You only need to compare the US to Norway to see how the main driver for EV sales is coming from government subsidies. Total Norwegian EV incentives cut the cost of running a typical 60 kWh battery pack from over $200/kWh to negative $336/kWh. US incentives bring it down to negative $23/kWh. The consequences are clear: generous Norway sees EVs take 31% of the market share in cars. In the US it’s 1.4%. That makes EVs a luxury item in the US (like many other countries): the “affordable” sub-$40k EVs still languish around 0.3% of market share. In Norway it’s around 25%. As US legislators fight over this year’s cuts to EV subsidies, Schalk Cloete looks closely at the numbers.
- The US and Norway achieved electric car market shares of 1.4% and 31% respectively in 2018.
- These sales were largely driven by incentives that reduce effective costs for a 60 kWh battery pack to negative $23/kWh in the US and negative $336/kWh in Norway.
- In other words, customers in the US and (especially) in Norway can currently own electric cars for much less than would ever be possible in an open market.
- The first four months of 2019 showed the effect of a relatively small incentive cut for Tesla in the US, resulting in large reductions in sales and profits.
Battery cost is generally accepted as the most important factor in determining battery electric vehicle (BEV) competitiveness. Advocates assert that battery cost reductions will soon render conventional internal combustion engine (ICE) vehicles uncompetitive, leading to a step-change from ICEs to BEVs.
This article will try to bring some realism to this extreme view. Today, BEV deployment is heavily dependent on various incentives. One can therefore get an idea about the future competitiveness of BEVs by subtracting these incentives from the current battery pack cost to calculate the effective battery pack cost seen by car buyers today. In so doing, we can learn something about future BEV demand from today’s sales statistics.
The effective battery pack cost will be quantified for a 60 kWh battery for two important BEV markets with clear and open data: the US and Norway.
Data from the US
After initial production challenges, the Tesla Model 3 took the US market by storm in the second half of 2018. Sales got a big dual boost from two and a half years of pent-up demand and the rush before the federal tax credit is halved, but the first third of this year saw more modest sales. As shown below, the US 12-month moving average now stands at 1.5% BEV market share.
Aside from the Model 3, there has been little change. Affordable BEVs still languish around 0.3% market share, showing that electric cars remain a luxury in the US.
US incentives consist mainly of the $7500 federal tax credit, about $2500 in average state-level rebates, and different regulatory credits amounting to about $2000 per vehicle. BEVs also don’t pay any gasoline tax, which saves about $300/year. A previous article gives more details about these estimates.
As shown below, these incentives bring the effective battery cost down to negative $23/kWh. Note that incentives might be a little larger because the value of HOV (High Occupancy Vehicle) lane access and free charging is not included.
It is therefore clear that current US incentives bring the price of cars like the Chevy Bolt, Model 3 and Hyundai Kona below the lowest point they can ever achieve in an open market by essentially giving customers the battery pack for free.
As more models come to market and charging infrastructure gets expanded, BEV sales should increase, but this data suggests that a rapid ICE to BEV transition is unlikely.
Data from Norway
Norway also saw an impressive boost in BEV market share in 2018. Two main factors can be identified: the new Nissan Leaf sold very well, while tolls and fuel taxes on regular cars increased even more. In March this year, the Model 3 broke all records by accounting for over 30% of all cars sold, but sales fell back down to 6% in April.
The increase in the number of toll stations and toll prices, especially around the Oslo area, has been substantial. As illustrated by some examples in this Norwegian article, families in the Oslo area now pay about $2000 per year in tolls. However, BEVs will also have to pay about a quarter of this cost from June this year. The incentive calculations assume a toll saving of $1000 per year. More details about this and other incentives can be found in the previous article.
Overall, total Norwegian BEV incentives bring the cost of a 60 kWh battery pack to negative $336/kWh. Buying a BEV in Norway therefore remains a complete no-brainer for anyone who can adopt a BEV lifestyle. This is the kind of incentive required to achieve mainstream BEV deployment.
The story of Tesla and incentives
At the start of 2019, Tesla lost half of the Federal tax credit ($3750 per car). As shown earlier, this was accompanied by a 60% reduction in Tesla sales from Q4 2018 to Q1 2019. Global sales could not pick up the slack and Tesla had a rather disappointing first quarter, driving the stock down 25% so far this year.
There are certainly other factors than the subsidy cut explaining the drop in Tesla US sales. Perhaps most importantly, 3 years of pent-up demand for the Model 3 is now running out.
Tesla slashed prices aggressively in Q1 2019 to cancel out most of the effect of the reduced tax credit. Recent financial statements indicate that the resulting margin erosion was partially compensated for by unusually large (unsustainable) sales of regulatory credits, rising to $4000/car. As a result, the effective battery cost of Tesla cars to consumers hardly changed:
Another important hidden incentive is also becoming increasingly clear over time: loss financing by optimistic investors.
Tesla is a luxury brand, somewhere in between names like BMW and Mercedes (who sell cars for an average of $45000 at a net profit of $3500 per car) and Porsche (who sells cars for an average of $110000 with a net profit of $18000 per car). In 2018, excellent sales of the highest margin Model 3 trims to eager enthusiasts limited net losses to $3500 per car at an average sales price of $75000. In Q1 2019, losses widened greatly to $10000 per car, largely due to lower sales prices ($60000 per car).
Tesla has been making such losses for many years backed by repeated promises that long-term profitability is just around the corner. Now, the Model 3 is rolling out and Tesla is still making over $10000 less per car than required for a sustainable business.
For perspective, a chart is given below where such an “investor subsidy” of $10000/car is included. Financial data from the rest of 2019 will be very informative to better estimate the size of this subsidy.
Aside from its questionable financial performance, Tesla is still doing remarkably well. As shown below, Tesla sales are now in the same ballpark as German luxury competition in the US, although no displacement of the German brands is visible yet. Tesla sales will probably decline in 2019 if subsidies are not increased again, but the brand will remain a major player in the luxury space in the US.
Electric cars are well suited to luxury brands where battery costs are a smaller fraction of the total car cost and the instant torque and quiet performance of electric motors is highly valued. It will be interesting to watch whether Tesla can continue defying the odds in its quest to bring BEVs to mainstream car buyers.
Schalk Cloete is a Research Scientist at Sintef.