Electric Vehicles: Looking Past the Headlines and Evaluating the Numbers Part II: What is Important to Consumers?

April 29, 2022

Stephen C. Lynch, CFA, CPA, Director and John T. Mickelinc, CFA, Associate
Downstream Energy & Convenience Retail Investment Banking Group

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Introduction
Based on the recent increase in EV market share, which was covered in Part I of this series, recent trends show that EVs will likely continue to become a larger portion of the current domestic light passenger vehicle fleet. However, attempting to predict the future trajectory of EV market share is an extremely difficult task and is not something we will explicitly undertake. There are simply too many factors influencing EV market penetration – some of which we briefly introduced in Part I of this series.

We will, however, help our readers think about the future by looking at several consumer or demand-side factors. We believe these factors could be good indicators that may signal future shifts in the EV penetration rate.

What is Important to Consumers?
In recent studies performed by Deloitte [1,2,3], it was determined that consumers in the United States still overwhelmingly prefer internal combustion engine powertrains for their next vehicle and only have a modest desire to purchase a BEV or hybrid [i]. Moreover, consumers’ preference for BEVs reached 8% in 2020 and – interestingly – decreased to 5% in 2021, despite an overall increase in EV market share during this time. It is hard to speculate as to what caused these trends in consumers’ preferences, but perhaps, as Deloitte postulated in its study, it is the basic desire to find comfort in affordable and proven technology during uncertain times.

[i] Deloitte does not differentiate between PHEV and HEVs within its Global Auto Consumer Study.

Even though consumers still greatly prefer ICE vehicles for their next purchase, a recent report by the Pew Research Center [4] found that 39% of consumers are at least somewhat likely to seriously consider an EV the next time they are in the market for a new vehicle. An EV is still not the preferred vehicle type for most consumers, but there is evidence that the driving public, in greater numbers, is at least mulling over whether to purchase an EV.

One may ask – what is holding consumers back, particularly since EVs are often portrayed in such high regard?

The lack of model variety and availability are certainly factors, but that is expected to soon change. The United States’ EV market currently consists of only approximately 60 models, but as previously outlined in Part I, market share is significantly dominated by the Tesla Model 3 and Tesla Model Y. It is difficult to get an accurate tally of all the new EVs coming down the pipeline as auto manufacturers continue to add EV powertrains to existing lines and roll out entirely new models, but based on the headlines and announced commitments, it is going to be significant.

Choice will likely not be an issue in coming years as drivers can cross-shop Teslas against any number of competing models or evaluate entirely different offerings. We will not review the various models that are coming to market soon, but EVs such as the Ford F-150 Lightning – a battery-only version of the F-150, the bestselling vehicle in the United States for nearly 40 years straight – will provide a good indication of whether consumers are beginning to prefer EVs to ICE vehicles or if they have just been infatuated with Teslas over the last several years.

Model choice is an important factor impacting EV market share, but Deloitte also surveyed consumers within its Global Auto Consumer Study across a number of years and asked participants to provide their greatest concerns regarding all battery-powered electric vehicles. For multiple years running, drivers in the United States have stated that their top three concerns are: driving range, lack of charging infrastructure, and cost/price premium. Since more than 70% of all participants surveyed during 2021 responded with one of these three concerns, we feel that, in addition to expanded model variety, the alleviation of these aspects for consumers may be an early indicator that greater EV market share is on the horizon. In this paper, we will explore the cost/price premium and driving ranges of EVs, and in Part III of this series, we will study the existing charging infrastructure within the United States.

EV Cost/Price Premium Versus ICE Vehicles
A 2019 study published by McKinsey & Company [5] found that upfront costs for EVs were approximately $12,000 more expensive than equivalent ICE vehicles. They also determined that battery costs represented the largest single factor in the price differential between EV and ICE vehicles.

Separately, Bloomberg New Energy Finance (“BloombergNEF”) has estimated that an average EV battery cost of $100/kWh [7] would allow automakers to produce and sell EVs at the same price as comparable ICE vehicles while earning the same profit margin on each vehicle. BloombergNEF also found that batteries for EVs, on a volume-weighted average basis, were priced at approximately $132/kWh during 2021. Since 2017, when EV batteries had an average cost of $226/kWh, EV batteries have decreased in price each year by approximately 13%.

Although BloombergNEF suggests that EVs will likely achieve upfront cost parity with comparable ICE vehicles in 2024 or before, this research was published prior to a recent fivefold increase in lithium carbonate prices, which is a key material in most EV batteries. Morgan Stanley noted [8] that this spike in lithium carbonate prices could result in battery makers increasing the price of EV batteries by almost 25%, which could, in turn, cause EV manufacturers to raise the prices of their vehicles by as much as 15%. Given that this expected increase in EV batteries is driven by the demand for lithium carbonate significantly outstripping supply, the downward trajectory of the EV battery price curve seen in Figure 3 is likely to experience quite a setback. However, it is uncertain how prolonged and significant this impact might be, especially given the number of competing uses for lithium batteries that could significantly impact demand. Examples include (i) a material expansion in the EV fleet, (ii) grid-scale battery installations to supplement power generated from renewable energy sources [ii], and (iii) battery-powered electronics.

[ii] An example of a grid-scale battery project is the Moss Landing battery energy storage system (“BESS”), which was commissioned by California in July 2021 to buffer the volatility of solar-generated electricity. The Moss Landing BESS includes an array of 100,000 batteries that contain as much lithium as approximately 20,000 Tesla EVs. This facility can supply four hours of continuous energy to the California power grid.

On another front, the Biden Administration has continually pushed for increasing the EV tax credit by $5,000 (from $7,500 to $12,500) as part of its Build Back Better (“BBB”) framework. Even though this potential legislation has stalled in Congress, it is clear that incentivizing consumers to purchase EVs is a top priority for the current administration. Key provisions of the current EV tax credit and the proposed changes under the BBB proposal have been summarized in Figure 4.

While the proposed $5,000 increase is likely what grabs most people’s attention, this expansion is largely to incentivize certain automakers to bring more manufacturing to the United States as the only vehicles that would currently qualify for anywhere near the full proposed tax credit are the Chevrolet Bolt EV and Bolt EUV [9]. For this reason, only a relatively small number of EV buyers would enjoy the benefit of the full $12,500 tax credit if BBB were to pass and be enacted as proposed.

However, what is significant for a larger number of potential consumers under the BBB proposal is the reactivation of eligibility of these tax credits for EVs made by Tesla and GM. Tax credits for both of these manufacturers expired in 2019 after each surpassed 200,000 in qualifying EV sales in the United States, but proposed changes under the BBB plan would allow buyers to once again claim a tax credit (likely $7,500) on new Tesla and GM EVs.

Another important provision of the BBB proposal is that it would allow the EV tax credit to not only be refundable [iii] but also potentially transferable to an auto dealer in exchange for savings off the sticker price. Under this approach, the EV tax credit could effectively become a point-of-sale rebate rather than a nonrefundable tax credit as it stands today.

Automobile manufacturers, particularly Tesla, have continually stated that one of their top priorities in regard to EVs is to reduce initial purchase prices. Despite the expected near-term spike in EV battery costs, it is likely that the upfront cost or price premium of EVs, when compared to equivalent ICE vehicles, will soon be diminished as a hurdle for consumers. This could especially be the case if the changes to the EV tax credit proposed under the BBB framework come to fruition in some form or fashion. We will not attempt to predict when or if that may occur, but we encourage our readers to continue to closely monitor developments regarding overall EV battery costs and the federal EV tax credit.

EV Driving Range
In 2021, consumers cited driving range limitations as their number one concern when considering EVs. In fact, this concern has its own name: range anxiety. Compared to similar ICE vehicles, EVs do in fact have limited driving ranges and, when paired with much less abundant refueling/charging infrastructure and markedly longer refueling/charging
times, can become a real concern for those with long commutes, planning extended trips, or dealing with uncertain travel plans and/or unexpected traffic delays.

[iii] Refundable Tax Credit: A tax credit that can be used to increase a taxpayer’s tax refund or to create a tax refund when one would not have existed otherwise.
Nonrefundable Tax Credit: A tax credit that cannot be used to increase a taxpayer’s tax refund and cannot create a tax refund when one would not have existed otherwise. Any unused portion of the tax credit is lost.

Driving ranges for EVs have significantly increased within the last several years as batteries used in EVs have become both more efficient and cheaper (i.e., more stored battery energy can be added to vehicles at the same cost, ceteris paribus). A simple example of this impact can be seen within the Nissan LEAF, which is one of the longest-standing, continually produced BEVs on the market. As seen in Figure 5, the 2011 model year of the Nissan LEAF had a total driving range of 73 miles compared to the 2020 model year, which had a total driving range of 226 miles. On average, this represents an increase of almost 14% in driving range with each model year.

In addition to the driving ranges of existing models increasing over time (e.g., the Nissan LEAF), the driving range of the overall EV fleet also benefits when entirely new EVs models are introduced. These new entrants generally feature new or more efficient technology that often results in these new models having driving ranges that exceed existing models.

While much can be said about the U.S. Environmental Protection Agency’s (“EPA”) mileage and driving range statistics compared to real-world results, the following EPA data does provide a consistent barometer that shows a significant increase in EV driving ranges over time. Similar to the trends shown above for the Nissan LEAF, the median driving range for EVs sold in the United States increased from 68 miles for the 2011 model year to its peak of 259 miles for the 2020 model year. This represents almost a fourfold increase in a span of only nine years and is equivalent to an annual increase in driving range of approximately 16% for each model year.

Figure 6 plots median driving range, which is a common measure of central tendency, but the average driving range of the overall EV fleet in the United States is likely higher than this median statistic. This is primarily due to the outsized market share of the Tesla Model 3 and its EPA-rated driving range of 299 – 322 miles, depending on options, for the 2020 model year. As a result, the average driving range experienced by most EV drivers, at least based on EPA-ratings, is likely higher than the median range reported in Figure 6. In contrast, the median driving range of ICE vehicles with a full tank of fuel as of May 2016 was 412 miles [10] and is likely now higher due to Corporate Average Fuel Economy (“CAFE”) standards.

The trend of increasing driving ranges will likely continue into the future due to the technological learning curve, but the existing EV fleet is likely already satisfying the needs of most drivers on a day-to-day basis. Based on a 2017 study by the Oak Ridge National Laboratory (DOE) [11], the vast majority of vehicle trips in the United States are well within the median driving range of the EV fleet. For example, 95% of all vehicle trips in the United States are 30 miles or less while the overall average trip length across all vehicle trips was 10.5 miles and the average daily vehicle miles per driver was 28.5 miles [12].

For times when an EV may not be the best choice of vehicle, such as during a long road trip, 89% of EV-owning households in the United States also possess a non-electric vehicle [13]. Overall household ownership of non-electric vehicles may decrease over time if EVs become more commonplace, but as it stands today, the vast majority of households have a non-electric vehicle that can be utilized when an EV does not seem prudent.

One important downside to EVs is that their range can be significantly impacted by outside weather conditions. According to AAA [14], the average driving range of an EV can decrease by up to 59% in cold temperatures (20 °F or lower). However, this phenomenon is not just limited to cold temperatures. AAA also found that hot temperatures (95 °F or higher) can also cause a reduction in EV driving ranges of up to 35%. This is attributable to not only fundamental EV battery technology but also due to the heavy use of climate control within the vehicle cabin to keep its occupants comfortable. While many of the climate control systems on ICE vehicles rely on mechanical advantages (e.g., using the heat produced by an ICE vehicle’s engine to warm the interior), EVs must tap into their battery store – to the detriment of its driving range – to heat and cool the vehicle’s cabin.

Even with climate-induced range limitations, the current EV offerings, while still currently lagging behind ICE equivalents, appear to sufficiently cover the vast majority of day-to-day trips for the American driving population. There will always be exceptions to this broad generalization, such as super-commuters or extended road trips and vacations, but as long as EV drivers have adequate access to EV chargers, particularly in those areas of the country that experience significant and prolonged extreme cold or hot weather, range anxiety may eventually subside as a chief concern among motorists.

Conclusion
We have established the top three concerns for consumers in regard to EVs: cost/price premium, limited driving range, and the lack of charging infrastructure. From a consumer-focused perspective, alleviation of these concerns, as well as expanded model variety, will likely lead to further increases in EV market share.

EV batteries are currently the largest single factor related to the difference in upfront costs between EVs and ICE vehicles. Although recent supply and demand imbalances of source materials may disrupt the downward trend in EV battery costs, the overall trajectory of EV battery prices suggests that cost parity between EVs and ICE vehicles is possibly on the near horizon. However, the decreasing trend in EV battery costs could also be heavily impacted by a material expansion of the overall EV fleet or by other competing uses for lithium batteries.

Upfront cost parity between EV to ICE vehicles may also be greatly accelerated based on proposed changes to the federal EV tax credit. Although the Biden Administration’s BBB bill is currently stuck in Congress, the current BBB proposal includes many changes to the EV tax credit policy that could ultimately prove to further incentivize consumers to purchase an EV.

Finally, the current driving range of EVs is likely already at a level that can sufficiently support the vast majority of vehicle trips in the United States. Despite that, range anxiety is a real concern, especially in hot or cold regions of the country, during long road trips, or for drivers with trips that include a higher degree of uncertainty (e.g., number of stops, drive lengths, traffic, etc.). Even though consumers cite EV driving range as an independent issue, access to consistent and reliable charging can likely reduce or alleviate this as a top concern for drivers. We have not yet covered the issue of charging networks in the United States, but that will be the primary topic in the third and final installment of this series.

About Matrix Capital Markets Group, Inc.
Founded in 1988, Matrix Capital Markets Group, Inc. is an independent, advisory focused, privately-held investment bank headquartered in Richmond, VA, with an additional office in Baltimore, MD. Matrix provides merger & acquisition and financial advisory services for privately-held, private-equity owned, not-for-profit and publicly traded companies. Matrix’s advisory services include company sales, recapitalizations, capital raises of debt & equity, corporate carve outs, special situations, management buyouts, corporate valuations and fairness opinions. Matrix serves clients in a wide range of industries, including automotive aftermarket, building products, business services, consumer products, convenience retail, downstream energy, healthcare and industrial products.

Disclaimer
The contents of this publication are presented for informational purposes only by Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”), and nothing contained herein is an offer to sell or a solicitation to purchase any of the securities discussed. While Matrix believes the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non‐infringement. Matrix assumes no responsibility for errors or omissions in this presentation or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.

SOURCES

1. Deloitte Touche Tohmatsu Limited. 2021 Global Automotive Consumer Study. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-2021-global-automotive-consumer-study-global-focus-countries.pdf

2. Deloitte Touche Tohmatsu Limited. 2020 Global Automotive Consumer Study. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-2020-global-automotive-consumer-study-global-focus-countries.pdf

3. Deloitte Touche Tohmatsu Limited. 2019 Global Automotive Consumer Study. https://www2.deloitte.com/gr/en/pages/consumer-business/articles/2019-Global-Automotive-Consumer-Study.html

4. Pew Research Center. (2021, June 7). Electric Vehicles Get Mixed Reception from American Consumers. https://www.pewresearch.org/fact-tank/2021/06/03/electric-vehicles-get-mixed-reception-from-american-consumers/

5. McKinsey & Company. (2019, October 28). Making Electric Vehicles Profitable. https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/making-electric-vehicles-profitable

6. Consumer Reports. (2020, October). Electric Vehicle Ownership Costs: Today’s Electric Vehicles Offer Big Savings for Consumers. https://advocacy.consumerreports.org/wp-content/uploads/2020/10/EV-Ownership-Cost-Final-Report-1.pdf

7. BloombergNEF. (2021, November 30). Battery Pack Prices Fall to an Average of $132/kWh, But Rising Commodity Prices Start to Bite. https://about.bnef.com/blog/battery-pack-prices-fall-to-an-average-of-132-kwh-but-rising-commodity-prices-start-to-bite/

8. Bloomberg. (2022, March 24). Morgan Stanley Flags EV Demand Destruction as Lithium Soars. from https://www.bloomberg.com/news/articles/2022-03-25/morgan-stanley-flags-ev-demand-destruction-as-lithium-soars

9. Road Show by CNET. EV tax credits: Manchin a no on Build Back Better bill, putting $12,500 incentive in doubt. https://www.cnet.com/roadshow/news/ev-tax-credit-manchin-build-back-better/

10. Department of Energy, FuelEconomy.gov (as presented by EVAdoption). Statistics of the Week: Comparing Vehicle Ranges for Gas, BEV and PHEV Models. https://evadoption.com/statistics-of-the-week-comparing-vehicle-ranges-for-gas-bevs-and-phevs/

11. Oak Ridge National Laboratory’s 2017 National Household Travel Survey. Share of all U.S. Vehicle Trips by Length (Miles). https://afdc.energy.gov/data/10318

12. U.S. Department of Transportation, Federal Highway Administration. Summary of Travel Trends, 2017 National Household Travel Survey. https://nhts.ornl.gov/assets/2017_nhts_summary_travel_trends.pdf

13. Energy Institute at Haas (University of California, Berkeley) (2022, February). Electric Vehicles in Multi-Vehicle Households. https://haas.berkeley.edu/wp-content/uploads/WP322.pdf

14. AAA (2014, March 20). Extreme Temperatures Affect Electric Vehicle Driving Range, AAA Says. https://newsroom.aaa.com/2014/03/extreme-temperatures-affect-electric-vehicle-driving-range-aaa-says/