By Leonardo Paoli, IEA Energy and Transport Researcher, and Simon Bennett, IEA Energy Technology Analyst
This article was published by the International Energy Agency on Oct. 10, 2019.
Encouraged by rising government support, global spending on electric vehicle (EV) purchases grew more than 70 per cent in 2018 to USD 82 billion, with USD 52 billion of this on battery electric light-duty vehicles (BEVs) and the remainder on plug-in hybrid electric light-duty vehicles (PHEVs).
While this represented little more than 2.5 per cent of the total light duty vehicle market last year, it does mean that USD 36 billion was added to the global EV market in just one year – this carries EVs past freight ships in terms of market size for new orders, and represents more than double the investment in new biofuels production capacity worldwide.
Yet as a share of total spending, the contribution of government support for EVs remained almost unchanged. Updating analysis from the World Energy Investment series, we are able to correlate vehicle prices, sales data and support schemes around the world to estimate the value of national government purchase incentives. And for the first time, we have included foregone government revenue from tax breaks as part of both government spending and total spending on EVs.
In 2018, we estimate government spending to have reached USD 15 billion, or around 18 per cent of total EV spending. This was roughly the same share as in 2017.
Around the world, governments support EVs in different ways, from simple lump sum grants or tax breaks to more complex formulas that vary with specific vehicle attributes or the incomes of buyers.
Globally, most support comes from direct expenditures. Less support comes from tax expenditures, and this can be hard to calculate. For example, it is not straightforward to estimate the counterfactual public cost of an additional EV sale in France, Italy or Sweden. In these countries a so-called “bonus malus” system redirects fees for emissions-intensive vehicle purchases to fund payments to EV buyers.
The ability of governments to stabilize and then reduce their share of total EV spending will be a key test of the sustainability of the EV market in coming years. Unless government incentives adjust as the market increases, considerable pressure will be placed on public budgets. Between 2012 and 2017, the government share of total EV spending generally rose, and it could very well rise again in future.
Policy changes are already being made in some countries to rein in the cost of support schemes such as a growing use of standards, regulations and mandates to shift costs from the public sector to consumers and manufacturers.
For example, the US federal tax credit for some manufacturers is being phased-out and will expire in 2020 unless renewed. In China, the maximum subsidy for EVs under the New Energy Vehicle incentive scheme has been halved since July 2019, reducing it to USD 3 700.
These policy changes are already having an effect on the EV market: Chinese EV sales are expected not to grow as strongly in 2019 as in 2018; those for July and August 2019 are actually 10 per cent lower than in the same months last year. US sales growth has also slowed.
There are of course additional benefits to government support. Firstly, even under today’s policies, roughly four dollars of consumer spending are generated for every dollar spent by governments.
In addition, by stimulating the market, incentives are having a significant effect on innovation. Since 2015 the R&D spending of fifteen major automakers has been rising at a faster rate than in any period since the start of the century and, importantly, at a faster rate than revenue growth.
Following a period when these companies reduced the share of revenue directed to research (in part in response to the financial crisis) innovation now represents a higher strategic priority. While stronger fuel economy regulations have played a role in stimulating R&D, much of this is now directed to electrification and digitalization.
Ultimately it’s tempting to see EVs following a similar path as solar PV, for which global subsidies hit USD 15 billion in 2010 and uptake has grown rapidly. However, there are some key differences between the two markets.
Whereas PV costs fell for a standardized good, EVs are widely differentiated by size, driving range, power and other characteristics that are valued by consumers.
For example, the global average selling price of a BEV per kilometre of range it can travel is falling, but consumers are getting more driving range for their money instead of buying the same range for less money.
Consumers are also buying BEVs that are on average larger and heavier. Essentially, a shift to vehicles that can drive further on a single charge is keeping the average EV price relatively stable. This is despite improvements for manufacturing and components like batteries that are making EVs cheaper on a like-for-like basis.
In 2018, two factors in particular buoyed average prices: the large share of registrations of the Tesla Model 3 in North America, which reached around 140 000 in 2018, and the increasing share of large, luxury PHEVs, particularly in China. Here too, policy plays a role. In China, BEVs with driving ranges below 150 km were phased out last year, and ranges below 250 km became ineligible this year.
This means that the assumed, low-carbon future of small, shared and automated BEVs doesn’t seem to be where today’s trends are heading. Rather, current EV markets are actually tilted towards bigger cars than those for internal combustion engines (not to mention that the car market is shifting to larger vehicles in general).
While plug-in versions can be more attractive for buyers of larger cars – due to higher fuel savings and lower relative cost increases – the overall costs of electrifying a fleet of bigger cars could be higher for governments and consumers alike.
These trends present a potential challenge for energy transitions, a topic that is taken up in detail in this year’s World Energy Outlook: how can efforts to maximize EV adoption in the near term complement a longer-term evolution of car sizes, ownership and driving patterns?
The EV market is growing at a whirlwind speed, with growth well above 50 per cent per year. But because it relies on government payments that cannot rise indefinitely, this growth raises risks and uncertainty even as battery costs come down. Furthermore, continued market growth will soon need to reach customers whose willingness to pay for an EV has so far been untested.
As was the also case for solar PV, countries are reforming incentives with the aim of limiting public expenses without diminishing the attractiveness of EVs to consumers.
Smart policy will be needed to avoid booms and busts, and encourage continuous reductions in average EV prices to reach new drivers, with cost-neutral bonus malus systems being just one example of policy innovation. Parallel government action will also be needed to ensure charging infrastructure, fuel economy standards and urban planning are all pulling in the same direction.
As key indicators of the transition to sustainable mobility, the IEA will continue to monitor average EV prices and the share of purchase costs that is being picked up by taxpayers. Both are currently stable, but recent policy changes signal potential decreases ahead.
Related commentaries have been published recently that explore other key factors shaping the value chain for energy investment and finance, including changing business strategies in the oil and gas and power sectors, capital allocation choices between different energy sectors in energy transitions and venture capital trends for energy technologies. The analysis presented here draws on data from EV Volumes, IHS and Marklines. It would not have been possible without the assistance of our former colleague Sacha Scheffer and Climate Policy Initiative.