Chasing Zero – Energy Transition
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3 Oct 2024
Insight
Global
3m read
Vehicles have been powered by fossil fuels for more than a century, with their sound, smell and look firmly ensconced in popular culture while their spread transformed the way we work and live. But affection for the internal combustion engine (ICE) is today expressed in increasingly nostalgic tones as looming bans on ICEs by the mid-2030s and engineering developments have driven a surge in electric vehicle (EV) sales. Today, nearly one-in-five cars sold is electric and global sales of batteries for EVs hit an all-time high in 2023, at nearly 14 million vehicles. In the last five years, the market share of EVs has increased more than sevenfold: in China, nearly 40% of all new cars sold are electric, with the figure currently at 20% for Europe and 10% for the US.
However, there are fears growth is stalling due to softening sales. Tesla, EV's posterchild, endured a turbulent 2024. In April, the US automaker reported a 9% decline in first-quarter revenue amid falling sales while its market capitalisation fell to $560 billion, compared with more than $1 trillion at its peak, though the figure has since rebounded somewhat. Meanwhile, Ford chief executive Jim Farley said in August the company's journey on electric cars had been "humbling" amid a $1.1 billion second-quarter loss in its EV unit. Elsewhere, China's primary EV manufacturers, such as BYD, have also been hit by falling foreign demand, with thousands of imported vehicles reported to be clogging up European ports.
Mixed signals in the last two years from some Western nations about the timelines for banning ICE vehicles – the biggest stick at policymakers' disposal – are also felt to have deterred automakers from investing and buyers from going electric.
"On the consumer side, with EVs, people are worried about cost, battery range and charging," says China-based Herbert Smith Freehills (HSF) corporate partner Calvin Ho. "Of course, cutting through that are different batteries coming to market and fast charging."
There is a push for electric vehicles but the reality is the development of the business is uncertain. What is necessary is support for building the EV network. Only then can consumers be persuaded.
Francesca Morra
Partner, Herbert Smith Freehills
The future of the electric vehicle market
Trade standoffs, while protecting domestic industry, are also leading to higher prices for consumers in the US and Europe. The EU is set to hit Tesla cars imported from China with a 19% tariff amid a more aggressive approach from Brussels on heavily subsidised imports from China, though the levy is less than the bloc imposes on China's EV manufacturers. The US, meanwhile, in May imposed a 100% tariff on Chinese-made EVs – a move which Canada has since replicated. As battery costs are the largest element of most electric cars – generally around 35% to 40% of production costs – and Chinese companies can produce EV batteries far more cheaply than global rivals – this means much higher short-term costs for consumers.
"Alongside technological advantages, China is ahead across the supply chain and has the logistics in place," says HSF energy and infrastructure lawyer Adrian Wong. "That's why, when the EU tariff comes up, it's a consideration for players in Europe like Mercedes and BMW – they have plants in China."
But costs are not the only factor curbing the EV revolution. According to a survey by S&P Global Mobility, an intelligence provider, 44% of consumers across countries cited availability of charging stations as a reason for not buying an EV. There have been interventions to address the challenge. In the UK, the Public Charge Point Regulations 2023 aim to ensure consumers can locate public charging points for their needs as well as allow for price comparisons across the charging network. However, charging infrastructure must be ramped up dramatically if consumers are to be persuaded, says Francesca Morra, HSFs Italian energy and infrastructure head:
"The key issue now is infrastructure and ensuring fast charging stations are easily available. To build that proper network, there will need to be state support. The network is absolutely not developed equally throughout territories. That is the big question mark: how do the governments want to support the industry itself but also the infrastructure?"
Funding at such scale is proving daunting, with lenders unconvinced by the revenue model of many EV charging projects. Typically, investors prefer projects with larger and more predictable revenue streams, such as those required for businesses with a fleet of EVs. Clarity around proposed charging models involved, securing offtake agreements with minimum pricing arrangements and 'land-banking' sites for potential future charging sites are flagged as steps to entice investors.
Unlocking this funding is vital to scaling the charging infrastructure needed to make battery-powered vehicles attractive to consumers. The Ford Model T became the premier car of its day because it was not just a potent symbol of innovation but also affordable and functional; EVs are only halfway there, totemic of an emerging post-modernity, but regarded as elitest and impractical by many consumers. "There is a push for electric vehicles, but the reality is the development of the business is uncertain," concludes Morra. "What is necessary is support for the building of the EV network. Only then can consumers be persuaded."
Related article: Financing EV infrastructure – Key factors for lenders in UK projects
Chapters
- Chasing Zero – Why battery power should unlock the energy transition
- Critical minerals – The race at the heart of battery storage
- Batteries and IP – Protect your innovation
- Scale electric? – The EV revolution risks stalling
- Buying lightning – Battery storage is reinventing the grid
- PFAS explained – What forever chemicals mean for clean energy dispute risks
- Key terms in battery energy storage markets
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