Low-cost policy pathways for electric vehicle deployment

Electric vehicles (EVs) have multiple advantages: they help reduce global emissions, local air pollution, and oil imports. They are well-positioned to play a key role in the decarbonisation of the transportation sector, which currently accounts for 15 per cent of global emissions worldwide¹, and a much higher share in jurisdictions with high levels of decarbonisation of the power sector. 

Given its potential, many countries are pursuing aggressive EV targets—including Australia, Germany, India, and China—with developing countries in lockstep with developed countries. For example, China aims to increase the share of EVs in new car sales to 25 per cent by 2025.² India has set a similarly ambitious target: 30 per cent of all vehicles are to be EVs by 2030.³ To meet these targets, governments have issued supporting policies as well as subsidies.

The rationale for subsidies is that EVs are more expensive than comparable internal combustion engine vehicles (ICEVs), based on shelf price.⁴ This is primarily due to high battery costs,⁵ even though the cost of manufacturing the rest of the vehicle may be cheaper.⁶ However, given that there are many different kinds of EVs in the market (e.g., two-wheelers, three-wheelers, and four-wheelers), a key question is how can limited government budgets be used to subsidise EVs cost-effectively;⁷ and, do all EVs need subsidisation uniformly?⁸ 

To answer these questions, we need to first how EVs compare with ICEVs in terms of upfront costs and lifetime costs, which include both upfront and operating costs.⁹ 

The true cost of EVs

As argued in previous work¹⁰, appropriately discounted lifetime costs—in net present value (NPV) or total cost of ownership (TCO) terms—are the appropriate metric, given that they allow for an apples-to-apples comparison of costs between different options across different cost profiles over time. This is similar to the metric already used for comparing different sources for electricity generation—i.e., the levelised cost of electricity (LCOE).¹¹ 

Now, in case of lifetime cost parity in terms of TCOs, even if upfront costs are different due to the varying costs of batteries, financial innovation using annualisation can be used to make EVs cost-competitive with ICEVs at all time periods. Annualisation is a more general form of the popular car leases currently used for ICEVs¹², which distributes the upfront cost into equal annual costs. In the case of EVs, annualisation would essentially distribute all the upfront costs as well as operating (including fuel, maintenance, and insurance) costs into equal annual costs, making EVs competitive with ICEVs in the long run. This financial innovation is expected to play a key role, as electric utilities and/or automakers, given their unique strategic position in the EV value chain, may need no or very little subsidisation in this scenario.

A low-cost phased development pathway

While designing a low-cost policy pathway, it is important to note that though some vehicles (e.g., some four-wheelers) may not have lifetime cost parity today, there are others (e.g., two-wheelers) that already have lifetime cost parity. Thus, a low-cost policy pathway, focused on business model innovation, could be deployed in phases: it could focus on the deployment of EVs with lifetime cost parity in the first phase, given that this category does not require any explicit subsidies while focussing on getting annualisation to work by supporting business model innovation in other EV sectors.

Such phased deployment would result in lower battery costs via local learning-by-doing, as battery chemistries are shared across segments. Further, at the same time, battery costs may reduce through global technological advancements as well as scale effects.¹³ Thus, scaling EVs with lifetime cost parity in Phase 1 will lead to lower battery costs, rendering lifetime cost parity for EVs that do not have lifetime cost parity today, which can then be targeted in Phase 2. This sequencing argument has already been presented for stationary battery storage¹⁴ and is equally applicable to EVs.

This low-cost policy pathway also indicates that deployment pathways should be different for different vehicle segments. That is, based on our analysis,¹⁵ the focus first needs to be on the diffusion of vehicles with lifetime cost parity – i.e., two-wheelers, three-wheelers, and shared four-wheelers (e.g., taxis and buses).¹⁶ In fact, compared to a business-as-usual pathway for all vehicles, the low-cost policy pathway can help India save on planned subsidies (a total of INR 100,000 million) under the FAME II Scheme.