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4 financial roadblocks for EV adoption

Despite increasing encouragement from automakers and governments, electric vehicle (EV) adoption is still hampered by several hard-to-crack economic dynamics.

Driving the shift to electric vehicles is a complex challenge that entails evolving business models, government regulations and entrenched buyer preferences.

Already, federal regulations designed to address global climate change and overcome dependency on oil imports have come into play in a big way, like corporate level fuel economy (CAFE) standards mandating that new passenger car and light-duty trucks improve their efficiency to 54.5 miles per gallon by 2025.

But with EV market shares still below 1 percent in most major markets, an expansive and coordinated effort among all stakeholders is still needed to address key financial roadblocks. Among those business model imperatives are:

1. Manufacturing costs

The most significant barrier to the adoption of EV technology is the cost of components. While operating costs are much lower in comparison to fuel-powered vehicles, up-front costs remain much higher.

Increased vehicle production development costs are driving the high purchase prices. The estimated 2.5 percent profit on EVs after manufacturer costs doesn’t leave much financial incentive for automakers or retailers.

With greater production volume, the hope is that substantial cost reductions will be achieved. And cost competitiveness is a challenge that car manufacturers have confronted in the past, as they did with air bags and anti-lock braking systems.

EV’s based on existing vehicle designs could likely add to cost competitiveness by utilizing common plants and making the body of the vehicle at least on par with conventional counterparts.

2. Battery costs

Thankfully for the EV market, battery costs are dropping at a rapid pace after being cut in half during the past four years alone.

Price per kilowatt hour of the battery ranges from $500-650 for a Nissan Leaf with a 24 kWh battery cost around $12,000 — about one third of the car's total retail price.

Prices have already dropped substantially in the past 7 years. In 2008, battery prices were closer to $1,000. In the not too distant future battery packs should come down further, with the latest projections indicating a range of $300-325 by 2020.

However if prices keep falling at the current rate  of around 8 percent per year, the elusive $150 per kWh price at which it’s believed EV’s can become truly competitive could be reached within the next decade.

3. Charging infrastructure costs

Arguably the most urgent need in all EV markets is in the financing of charging infrastructure, which is often described as a "chicken and egg" dilemma facing the market.

In other words, does a charging infrastructure need to be in place before consumers start purchasing, or will purchasing drive an increase in public charging stations?

With government contributing to infrastructure investment, EVI member governments alone have already invested around $800 million in infrastructure spending to date. The real question now is how governments will or will not contribute financially to charging infrastructure.

Instead of relying so heavily on government assistance, one option is for myriad charging businesses to take up the demand for public charging stations.

4. Energy storage costs

The adoption of EVs will likely be hugely influenced by tax reform, smartgrid development and the development of new business models to better optimize the use of the energy network.

So far, the additional load on the electricity grid due to deployment of EVs is fairly low. Even in California, where EV sales are the highest, utility companies have done relatively little to date to brace for the impact of EVs on existing systems, stating that upgrading transformers is well within the normal cost of doing business.

Furthermore, as a matter of energy security, environmental responsibility and economic progress, countries like the US and Australia — two of the biggest energy exporters in the world — still rely heavily on imported liquid fossil fuels for transportation.

The EV advantage

So just who benefits from an increased demand of electric vehicles beyond car manufacturers?

There is a huge range of business partners that may benefit exponentially from an increase in the number of electric vehicles in the world’s fleet.

We are already seeing many companies benefit from the use of electronic vehicles. Park-and-go retailers in California have adopted free or discounted charging facilities that encourage customers to visit their stores more often. These include Target, Ikea, Walgreens, Kohl’s, Kroger and McDonalds.

Medium and heavy-duty vehicle fleets are similarly seeing substantial value in transitioning to a greener alternative, thanks to the lower operating costs and less maintenance required. Fleets with highly predictable routes are most advantaged by electric vehicles.

As most fleet managers take a total cost of ownership approach to vehicle acquisition, electric vehicles are a great option. Some of the nation’s best-known brands have already begun to integrate EV’s into their fleets, including FedEx, Coca-Cola, GE, UPS, Frito-Lay, Staples and Hertz.

But in order to meet the nation’s sustainability goals at scale, a healthy dose of patience and proactivity is needed for those anticipating a new era of clean transport.

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