9 Jun 21

Switch to EVs costs China €12.8 bn per year

We’re always hearing about the benefits of electrification – and they are many: better air quality, lower CO2 emissions, and pretty soon, EVs with a lower TCO than fossil-fuel vehicles. But the switch also comes at a cost. Researchers at MIT have now calculated how much exactly, using China as the prime example.

The Chinese government has set itself a lofty goal: by 2030, 40% of the vehicles sold in China must be electric. It’s a decision rooted in a realisation that struck China’s planners around the turn of the millennium. 

Generous subsidies
Predicting that China would become the largest automotive market in the world (as it since has), they foresaw two major consequences of widespread car ownership:

  • High levels of air pollution, which would be harmful both to its own population and to the planet’s ecosystem. 
  • An increase in the country’s dependency on foreign oil.

The solution to both issues: go electric. So in 2009, China launched a generous system of subsidies for consumers buying EVs.

  • This proved so popular that it turned out very costly, so the subsidies were phased out by the end of 2020.
  • In their place came a so-called EV mandate: quotas were imposed on the OEMs, which will get stricter as time goes on, and which must lead to EVs making up 40% of car sales in China by 2030.

This is a policy with massive consequences, both within and outside of China. China’s mass production of EVs and EV batteries is driving down the cost of both, making them more affordable in other countries too. Inside China, the switch to EVs has measurable health and environmental benefits. But the switch also has a financial cost. 

Battery prices
Batteries make up a large part of the cost of an EV. However, the prices of those batteries are falling rapidly. This is not just an effect of scale (i.e. producing more batteries), but also of technological improvements (i.e. producing better batteries). Battery prices are still falling, but that process will slow and eventually stop, as the prices get closer to the cost of mining and processing the minerals required for those batteries (i.e. lithium, nickel, manganese, cobalt). 

This process has important consequences in light of the course change in 2020 – the end of consumer subsidies, and the start of quotas for the OEMs.

  • While EVs make up just 7% (1.6 million vehicles) of total sales in 2020, MIT projects that share to rise to 21% (5.4m) in 2025, and 37% (11.7m) in 2030.
  • This means a total of 66 million EVs will have been sold in China in the decade between 2020 and 2030. 
  • Of those, two-thirds will be battery-electric vehicles (BEVs), in large part because OEMs are incentivised to produce these 100% electric vehicles, especially those with a large range (read: a big battery).

However, this will come at a cost for the vehicle owner.  

  • Taking into account Total Cost of Ownership (TCO), the researchers found that owning an EV was cheaper before 2020 thanks to the purchase subsidies – now phased out.
  • Since then, owning a PHEV is about as expensive as owning an ICE vehicle. And owning a BEV will be more expensive until 2030 – only then will falling battery prices have made up the difference.  

Cost to consumers
The researchers also calculated the TCO of China as a whole for the adoption of EVs.

  • Adding up the additional TCO per EV over time, they arrived at an average extra cost of 1 trillion yuan (€128 billion) for the period from 2021 to 2030 – or 100 billion yuan (€12.83 billion) per year.
  • That is about 2% of the average annual spend in the transport sector for China as a whole.
  • Put differently, it equates to about 0.1% of China’s GDP.

That may not seem like much, but it is money spent by the drivers of those EVs that is no longer disposable for spending otherwise. Of course, the extra cost of EV adoption needs to be offset against its benefits – including the health cost saved by eliminating air pollution, and the energy cost saved by not having to import petroleum. While such benefits appear to be substantial, according to the MIT researchers, they are in the same order of magnitude as the costs, making the result as yet too close to call. 

And in Europe?
The main building blocks of China’s electrification strategy – incentives, quotas – are similar to the instruments in other parts of the world. But that doesn’t mean they are put together in the same way, or with the same effect, including on cost.

Having learnt from China’s example, Europe could conceivably do a better job of the energy transition, suggests a report released yesterday by the European Technology and Innovation Platform on Wind (ETIPWind) and WindEurope, the trade organisation of the European wind energy industry.

The report concludes that achieving a net-zero economy (i.e. not just transport, but every other industry) would cost 10.6% of Europe’s GDP – exactly the share that today’s energy system costs us. And that wind energy will lead the charge. Some salient points from the report:

  • Today, about 25% of Europe’s energy systems are electrified. By 2050, that share is forecast to rise to 75%, of which 57% will be provided directly and 18% indirectly (via hydrogen, etc.).
  • The report estimates that individual road transport, short-distance shipping and rail transport will all decarbonise via direct electrification. It predicts that EVs will make up 50% of passenger cars by the late 2020s, and 50% of the commercial vehicle fleet by 2031.
  • Wind energy, already one of Europe’s cheaper forms of electricity production, will get cheaper still. By 2030, onshore wind energy will cost €33/MWh, a 28% reduction from today. Over the same period, the cost of offshore wind energy will drop by 65% to €64/MWh. By 2040, offshore wind will cost as little as €30/MWh.
  • The European Commission thinks it’s possible wind could become the EU’s largest electricity source after 2025. It could account for 50% of all energy production by 2050, up from 16% today. That implies a huge expansion of wind power: 
    • onshore, from 165 GW today to 1,000 GW by 2050, producing 2,300 TWh a year; and
    • offshore, from 15 GW today to 300 GW by 2050, producing 1,200 TWh a year.  

Purposely conceiving of wind energy – increasingly cheap and widespread – as the source of the electricity that powers Europe’s EVs is a future-oriented move that makes both economical and ecological sense.

Image: Shutterstock

Authored by: Frank Jacobs