The State of Vehicle Electrification

At the beginning of 2020, the market for electric vehicles remained in its infancy with less than 2% of vehicles sold in 2019 powered by electricity. Yet, market conditions have matured and the potential for market expansion continues to improve. This document presents the data and analysis relative to the electric vehicle market at the beginning of 2020.

June 09, 2020  read

The momentum of public opinion, government policy and the leaders of the automobile industry indicate that the future for electric vehicles will be bright. The technology that will enable electric vehicles to satisfy a growing segment of the transportation market is developing rapidly and very soon consumers will have a competitive economic choice between similarly equipped vehicles powered by traditional or electrified powertrains.

As the market grapples with reducing carbon emissions and the transportation industry seeks sustainable solutions, it is essential to understand the fundamentals of the market and to make business decisions based upon facts and realistic expectations for the future. This requires taking a fresh look at the data. There are many exciting developments in this space and electric vehicles are becoming more capable, affordable and convenient (i.e., charge times are coming down), but they are still in the very early stages of market growth.

Even with the expansion of sales of plug in vehicles over the past five years, there has been inconsistency in market penetration. The year-over-year change in sales of plug in hybrid electric vehicles (PHEV) and battery electric vehicles (BEVs) since 2015 shows the challenges of penetrating the vast light duty vehicle (LDV) market. Plug in vehicle sales in 2018 beat 2017 by 75% and many assumed this rate of growth would continue – this optimism was supported by rapid technology advancements and the introduction of more models to the market. By June 2019, sales of BEVs were up 96% over the previous year and it seemed indeed like 2019 was going to be an exceptional year. But then everything slowed down and overall plug in sales for the year ended lower than in 2018.

There are a variety of potential explanations for this, but one that should be considered is the expiration of the federal tax credit for electrified models offered by Tesla and GM. (Once a manufacturer sells 200,000 qualified electrified vehicles, the federal tax credit phases out for additional vehicles sold by that manufacturer. The tax credit is still available to other manufacturers until they reach the 200,000-unit threshold.) It is uncertain how this policy affected sales, or what other factors may have contributed to the decline in plug in vehicle sales or how trends may continue in coming years. One interesting fact to note about 2019, however, is that BEVs ended the year up 17.1% over 2018 while PHEVs dragged down the sector by dropping 30.6%.

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A fact that is often missing from the discussions about the transition to an electrified future is the fact that gasoline-powered vehicles remain dominant. Since 2015, sales of vehicles equipped to run exclusively on gasoline-powered internal combustion engines have yielded just 1.6% market share and continue to represent 92.4% of total light duty vehicle sales. The dominance of the gasoline engine demonstrates the challenge of transitioning the market to something new.

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When analyzing the market for non-gasoline powered vehicles, slight shifts in consumer purchasing behavior become apparent. In the electrified sector, BEVs did gain some market share, but at the expenses of PHEVs. Combined, they still represented only 1.9% of sales – the same market share they commanded in 2018. This is not to say that electrified vehicles do not have a bright future – the certainly do, especially when one considers the interest of the automakers, policymakers and the number of new models expected to be introduced in the coming years. But as for right now, they are still struggling to gain market share.

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Even if PHEVs and BEVs were to continue recording strong year-over-year sales, it would take many years before they would significantly impact the overall LDV fleet. For example, should the sector consistently record 20% - 26% sales growth through 2035, they could garner as much as 43% of the LDV sales market. However, given fleet turnover rates, the number of plug-in electrified vehicles on the road would represent slightly more than 10% of the fleet. As mentioned before, the LDV market is large and currently dominated by gasoline-powered ICEs and it will take many years of sales expansion to change the dynamics of the market.

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Electrified Vehicles Are Overcoming Consumer Concerns

Despite the slow start and the challenges facing EVs in their quest to penetrate the LDV market, there is tremendous cause for optimism about their future. Research indicates that consumers who are not yet ready to purchase an electric vehicle primarily are concerned with range, recharge time and purchase price. The EV market has responded. Vehicles are consistently delivering more than 200 miles per charge, with GM most recently announcing a battery system for its BEVs that will deliver 400 miles per charge. In addition, batteries are becoming more durable and fast charging is much more of a viable option. Tesla has announced that their new V3 Supercharging systems will have the ability to deliver up to 75 miles of range in five minutes of charge time.

Despite these advancements, purchase price remains a challenge. The majority of vehicles available in 2020 that offer 200 miles or more of range are also priced $40,000 or higher and average $44,272 (excluding the three vehicles with MSRPs of $100,000 or more). This purchase price may be outside the realm of affordability for most families to achieve a scale of mass adoption. Adding to this challenge is the fact that the federal tax credit of $7,500 is limited to the first 200,000 units sold by a manufacturer and already has expired for Tesla and GM. That being said, prices are coming down and are expected to continue to decline as batteries become more affordable. Since 2014, the price per kWh of BEV batteries has come down approximately 73%.

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It is assumed by many that within a few years, consumers will have the option to purchase a BEV that is priced competitively with a comparable ICE vehicle, has a range of 250 miles or more and can substantially recharge within 15 minutes. Add to this the fact that maintenance for a BEV is significantly less expensive than for an ICE and the option of an electric vehicle could be an attractive one for many customers. This reality leads to many optimistic forecasts for the future of the EV market.

In addition to these market forces creating opportunities for electrified vehicles, government policies also provide momentum. California’s Zero-Emission Vehicle (ZEV) Program requires most automobile manufactures to ensure a certain percentage of their sales into the state are ZEV. Qualified vehicles generate credits based upon their electric driving range. California increases the credits required each year from 4.5% in 2018 to 22% in 2025. California estimates that compliance with the 2025 requirement will equate to about 8% of new vehicles sold being ZEV and plug-in hybrids.

Ten other states have signed a memorandum of understanding with California establishing the Multi-State ZEV Task Force, committing to have at least 3.3 million ZEVs operating on their roadways by 2025. Signatories to the MOU include California, Colorado, Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Vermont. According to the National Automobile Dealers Association (NADA), in 2018 these states combined to represent 30% of new registered vehicles in the U.S., creating a strong incentive for vehicle manufacturers to increase production and delivery of electrified vehicles into these markets.

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Impact of Retail Gasoline Prices

Fuels Institute research has demonstrated that consumers are most focused on alternative-fueled vehicles when retail gasoline prices are high. For example, when retail prices where high ($3.64 per gallon) during a consumer survey in 2014, 84% of consumers said they would consider a hybrid electric vehicle for their next purchase. However, in a survey completed in 2016 when retail gasoline prices were lower ($1.74), the percentage of consumers who said they would consider an HEV dropped to 44%. Likewise, HEVs garnered their greatest share (3.2%) of the LDV sales market in 2013 when the average price of gasoline was $3.49, but that share dropped to 1.9% in 2016 when gasoline prices averaged just $2.13. (Fuels Institute,
Consumers and Alternative Fuels 2017”)

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Of course, market dynamics have evolved over the past several years and the attraction of electric vehicles for current customers may not be directly related to fuel prices; but if EVs are to gain a scale of mass adoption, consumers will be considering the retail price of fuel as a metric to guide their search for their next vehicle. If the advancements in fuel efficiency result in a drop in demand for liquid fuels as projected by the U.S. Energy Information Administration (EIA), then the impact on retail pump prices would likely be to the advantage of consumers. EIA’s Annual Energy Outlook 2020 projects that gasoline prices could climb 16.5% and diesel fuel 18.0% by 2040, putting gasoline at about $3.10 per gallon and diesel at about $3.59. It is unclear whether these prices will be sufficiently high to strengthen the appeal of alternative powertrains like EVs.

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