The transition to EVs🍋

EVs are getting popular, but mass take-up faces some big obstacles. What can the past tell us about the possible future?

Big technological shifts don’t happen overnight, particularly when people have a substantial investment in pre-existing products, and especially if there is uncertainty over which new technologies will predominate.

Electric vehicles (EVs)¹ in some form may eventually dominate car fleets. But who knows how long this might take?

The world made a huge shift from horse-powered to fossil-fuel-powered vehicles in the first half of the 20^th century. Depending on your criteria and your source, this shift took one decade, 12 years, or more than 50 years.

The first electric cars were built in the 1830s, and electric taxis were commonplace in New York until the early 1900s. However, the rise of the internal combustion engine (ICE) in the 1920s put an end to that, as the ICE offered a much longer range.

Vehicle technology continues to evolve, in response to market shocks (such as the quadrupling of oil prices in the 1970s) and regulatory pressures for improved safety and reduced emissions.

The catalyst for the modern all-electric car came when California passed the Zero Emission Vehicle Mandate. This aimed to ensure that 2% of the vehicles sold in the state would be zero emissions by 1998, and 10% by 2003.²

So far, the market penetration of EVs has varied widely across countries.

Red Crater and Mt Ngauruhoe. Tongariro National Park. Dave Heatley.

Global context

There are 1.7 billion passenger and light commercial vehicles globally, according to recent estimates. Of these, 290 million are in the US, 340 million in Europe, 77 million in Japan, 320 million in China, 45 million in India, and 60 million in Africa.³ New Zealand has just 4.5 million.

Many countries, including the US and China, have offered significant incentives to encourage EV purchases. The measures – primarily purchase subsidies, and vehicle purchase and registration tax rebates – were designed to reduce the price gap with conventional vehicles. Such measures were implemented as early as the 1990s in Norway, 2008 in the United States, and 2014 in China.⁴

Gradual tightening of standards for fuel economy and tailpipe CO₂ emissions has augmented the role of EVs. Today, over 85% of car sales worldwide are subject to such standards. More than 20 countries have announced the full phase-out of ICE car sales over the next 10‑30 years.⁵

At the end of 2022, there were about 25 million EVs (battery-electric (BEVs) plus plug-in hybrid electric (PHEVs)) vehicles on the road — roughly 2% of the global fleet.⁶ At that time, NZ was lagging behind the global average, with less than 1% of its fleet electrified. This proportion has now increased to 2.4%.

BEVs + PHEVs as % of NZ light vehicle fleet. Source: EVDB

Cars as experience goods

For most consumers, a car is a substantial and infrequent purchase, often involving external finance. Both purchase price and ongoing ownership costs are important considerations in purchase decisions.

Cars are experience goods ­– those where quality, long-run costs, or other attributes is imperfectly understood before purchase.

In markets where technology is evolving rapidly, falling prices may coincide with improved quality. This has been a feature of the markets for computers, hardware such as printers, and mobile phones and other electronics.

So, in the EV context, consumers face an adoption problem. How long should they search and when should they take the plunge?

Especially for a consumer durable like cars, it can take time and effort to assemble credible data about the ownership experience. For EVs — especially BEVs — this depends on the cost and availability of complementary services, such as charging networks, maintenance and repair experts, finance, and insurance. And, for those wanting to buy used EVs, pre-purchase inspection services.

Battery technology is evolving. Combined with a reduction in raw material prices, this has led to a rapid drop in dollars-per-kilowatt-hour of capacity. The relative attractiveness of BEVs is consequentially enhanced by promises of faster charging times, reduced weight, and increased range.

As for all vehicles, depreciation is a major cost consideration. Here it closely correlates with battery degradation and replacement costs in existing EVs, but also with expectations of improved battery performance in future EVs.

The experience of fleet owners may provide useful insights. Fleet owners, especially the larger ones, have the advantage of large sample sizes and detailed data on operating cost and depreciation. This helps them to undertake proper comparisons between different makes, models, body type, motive power, and locations.

Such fleets may have powerful (branding) incentives to respond to government programmes, for example by expanding their EV fleet. But “sustainability” has many dimensions – including commercial viability. Fleet expansion hasn’t necessarily run smoothly:

Hertz, which has made a big push into electric vehicles in recent years, has decided it’s time to cut back. The company will sell off a third of its electric fleet, totalling roughly 20,000 vehicles, and use the money they bring to purchase more gasoline powered vehicles.

Electric vehicles have been hurting Hertz’s financials, executives have said, because, despite costing less to maintain, they have higher damage-repair costs and, also, higher depreciation.

“[C]ollision and damage repairs on an EV can often run about twice that associated with a comparable combustion engine vehicle,” Hertz CEO Stephen Scherr said in a recent analyst call.

And EV price declines in the new car market have pushed down the resale value of Hertz’s used EV rental cars.⁷

Fast depreciation may be an early-stage issue while industry production volumes, costs and prices, and demand shake-out. But it does illustrate the pitfalls of projecting longer-term trends based on recent experience.

The strategies discussed by car manufacturers are also instructive. For example, Toyota has pushed back on regulatory pressures to concentrate on BEVs. It has argued for a slower transition than sought by governments in some countries.

The role of government

Debate about energy and decarbonisation often focuses on transport (and especially land transport). Many jurisdictions have identified EV uptake as a policy goal to reduce carbon emissions

Policies to encourage fuel efficiency are nothing new. For example, the quadrupling of international oil prices in 1973 led to huge short-term and long-term economic adjustments. These included a transition towards greater fuel efficiency in transport and other uses of petroleum. But much of the debate then, internationally and in New Zealand, was about energy security, rather than carbon emissions and climate change.

Given our small size and lack of domestic car production, decisions in New Zealand are unlikely to have significant influence on the speed or form of the global transition to EVs. Successive NZ governments have nonetheless sought to promote this transition to achieve emission reduction goals. 

Having ruled the roost for a century, ICE-powered vehicles come in a remarkable range of sizes, shapes, formats and price points, each targeted at different consumer niches. Increased capability and falling prices have made EVs competitive in some of these niches, but it could be years before they are available, let alone competitive, in smaller or specialised niches. Policy, or at least those policies available to NZ governments, is unlikely to improve availability in specialised niches.

We saw an example of the tension between encouraging EV uptake and fulfilling niche needs in the 2021 debate about whether farmers’ utes should be exempted from a new “clean car” levy (which aimed to encourage EV purchase and to discourage ICE vehicle purchase). At that time, electric utes did not yet exist.

In the next few years, solid state batteries may emerge offering major reductions in charging times and thus overcoming one of the major obstacles to fleet and private ownership of BEVs. And hydrogen fuel cells will likely be important for decarbonising freight transport, even if they remain a distant possibility for passenger vehicles.

So which levers should the NZ Government pull to achieve the desired transition? And how prescriptive should government be in the adoption of specific technologies? There are no simple answers to these questions. I think Asymmetric Information is a great place for an informed debate about them.

By Ian Duncan

Te Kahui Kaupeka Conservation Park, Canterbury. Dave Heatley

1. For the purposes of this post, EVs comprise three main categories: full electric (BEVs); plug-in hybrid electric (PHEV), and petrol-electric hybrid vehicles (hybrids). PHEVs use both a petrol and an electric engine powered by a plug-in battery. Hybrids use both a petrol engine and electric motors, with the petrol engine charging a relatively small capacity battery.

2. https://carbuzz.com/features/history-of-the-modern-electric-car

3. Thunder Said Energy. Global vehicle fleet: sales and electrification.

4. IEA. Policies to promote electric vehicle deployment – Global EV Outlook 2021 – Analysis.

5. Ibid.

6. Tracking global data on electric vehicles - Our World in Data.

7. https://edition.cnn.com/2024/01/11/business/hertz-tesla-selling/index