Financing Electric Vehicles

28 October 2010

Leading financial institutions that have adopted the Climate Principles, and members of the EV20, met in Brussels to discuss how private sector finance can help the world make the switch to all-electric vehicles (EVs).

The meeting, hosted by HSBC, focused on sharing perspectives on the specific finance and policy needs that would help accelerate the EV market and a discussion of some of the approaches that are already being taken.

Financing batteries – collaborating to share risk

The electric vehicle sector is forecast to advance rapidly over the current decade, but electric vehicles will only replace the internal combustion engine when they compete on price. Currently, the upfront cost of an electric vehicle is high and a big factor is the battery. Whilst improvements in battery technology and some modest increase in manufacturing capacity is helping to bring down the costs, the battery remains problematic from an economics stand point; both due to the upfront cost and the uncertain residual value – when the battery is no longer useable. The latter presents the biggest challenge for investors because they have to assume that the residual battery value will be zero. There is also some concern that the battery will actually become a net cost at the end of its life due to the special treatment needed before it can be scrapped or as a result of recycling charges applied to retrieve precious metals.

So far, car manufacturers needing to boost sales and demonstrate their technologies are taking the financial burden associated with the batteries, either by offering leasing schemes where batteries are switched as needed, or long-term servicing packages that provide customer confidence. The former is more attractive to the banks that are able to treat this business model in the same way as other leasing businesses. However, the car manufacturers take all the risk in this scenario, and what they really need is an option for sharing risk in financing development and deployment. The banks agree, recognizing that for them, the real gains will happen when the market is much bigger, and therefore it is in their interest to see the industry grow.

The role of the insurance industry in de-risking the technology and contributing its skills and expertise across the value chain was seen as essential.

Implementation of charging infrastructure

In contrast to the purchase of electric vehicles, there did not appear to be quite the same challenge in the context of charging infrastructure. Amsterdam has taken an extremely pragmatic approach and simply moved ahead with installation alongside offering incentives for the purchase of electric vehicles to consumers and business customers. What might appear a risky strategy from the perspective of driving a market for electric vehicles, actually turns out to be the most economic option for tackling another issue, improving urban air quality. Using standard fixtures, slow and quick charging points and providing a short-term offer of free parking and free charging (including free electricity), provided the incentives needed to kick-start the electrification of the city’s transport, and with a national scheme to purchase ‘green electricity’, the city could ensure they weren’t simply pushing the environmental problems further upstream.

The group welcomed the opportunity to discuss the different technological, political, regulatory and financial issues associated with the electrification of transport.

Key actions for The Climate Group’s EV20 initiative are:

  • to explore how financial institutions can collaborate with manufacturers and fleet owners to share the risks associated with batteries and
  • to ensure policy makers at a national and European level are aware of the framework incentive schemes and regulatory drivers that will help support cities and sub-national governments to implement change.

To learn more about the the EV20 initiative, please contact: Jim Walker
To learn more about the work The Climate Group does with the finance sector, please contact: Bjorn Roberts

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