Slow start for US electric vehicles, but times are changing

The future of cars is electric. But while the US is home to the world’s largest electric car manufacturer – Tesla – the domestic growth of EV sales has been relatively slow so far. Between 2015 and 2020, the EV fleet (battery electric: BEV and plug-in hybrid: PHEV) grew at an annual rate of just 28% compared to 51% in China and 41% in Europe. Still, electric cars are gaining traction in America, despite its affinity for gas-guzzling trucks and SUVs.

With electric cars (BEV + PHEV) expected to make up 14% of new sales in 2021, Europe is leading this transition, followed by China, at 9%. In the US, the share of EVs is only around 4%. Of these three regions, Europe has the most ambitious regulations. CO2-reduction goals now aim at a complete shift to zero emission vehicles by 2035, with several individual countries targeting an earlier date of 2030. This pushes electrification forwards and has also inspired several manufacturers to announce ambitious commitments to phase out the internal combustion engine (ICE).

Limited federal policies supporting EVs has been one of the reasons behind the slow uptake in the US. But the current government is ready for change. While the US did not sign up for a complete shift to zero emission cars at the COP26 climate conference this year, the Biden administration is aiming for half of all new passenger vehicle sales to be EVs by 2030. Earlier this year, Biden also announced plans to replace the government’s fleet of roughly 650,000 vehicles with electric models. The recently adopted Infrastructure Bill also gives a push to the development of EV infrastructure. Moreover, on top of the current $7,500 in EV tax credits for car buyers, the proposed Build Back Better spending plans offer an additional $4,500 if an EV is produced by union labour (13% of the EV sales in 1H 2021) and another $500 if the battery is manufactured in the US, driving the total credits up to a maximum of $12.500.

At the state level, California, New York and Washington aim to phase out internal combustion engine vehicles by 2035. California has the most aggressive policy and represents the largest EV fleet within the US. Several large US cities have also signed up for the COP26 declaration to work towards zero emission new sales by 2035.

Several state governments are offering incentives to buy EVs on top of the federal tax credits. Today, 47 states and the District of Columbia have rolled out tax credits, rebates, and research grants to boost the production and sales of EVs. For instance, Colorado is providing consumers with a $4,000 tax credit per purchased light-duty EV through 2021. In addition to a wide range of support, California has recently announced that $3.9 billion will be deployed to develop zero emission vehicles. This coincides with the highest fuel taxes in the country.

Large traditional car manufacturers are ramping up their efforts to electrify cars for the US market. The urgency to cut emissions is increasing and the threat from pure electric players such as Tesla, Rivian and Lucid is growing. The potential entry of Chinese brands such as BYD is also adding to the pressure.

Ford, General Motors (Chevrolet, Cadillac, Buick) and Stellantis (o.a. Jeep, Chrysler, Dodge, RAM) have already made plans to shift away from ICE vehicles and at COP26, Ford and GM pledged to work towards 100% zero emission new car and van sales in leading markets by 2035 “or earlier” and by 2040 at a global level. Other brands with significant market shares, like Nissan and Kia, aim to shift before 2040.

Japanese manufacturers Toyota (incl. Subaru) and Honda top the US car market, but lag in electrification

Leasing and rental companies show an increasing appetite to invest in the electrification of their fleets. Corporate fleet owners – buying roughly half of the new cars sold - may be at the forefront of this transition as they usually buy new vehicles, vehicles are frequently replaced and they drive more miles (since operational costs of EVs are lower, this makes them attractive). For many consumers, rental cars provide an opportunity to try out driving an EV.

The total cost of ownership is an important factor in measuring the success of electric vehicles. Battery prices have continued to fall, leading to lower prices and making EVs generally more affordable. But there is more to take into account, particularly the charging infrastructure (see constraints below). Additionally, Americans prefer to purchase bigger vehicles, drive longer distances and enjoy cheaper petrol prices than consumers in Europe. These factors make EVs less competitive in the US market and contribute to a longer transition phase.

The introduction of electric light trucks is encouraging given the preferences of US car buyers. Three out of four light vehicle buyers preferred a ‘light truck’ in 2020 (including many vans and SUVs). Outside densely populated urban areas, these are particularly popular vehicles. Hence, for electrification, the availability of electric light trucks is a prerequisite for success. Several electrified SUVs are now available and the first electrified Ford model F150, as well as the upcoming electric vans and light trucks of Rivian, could contribute to the uptake of EVs in the US.

How will the transition play out? Given the political uncertainty affecting the US EV market and other factors (see end of article), we look at two scenarios for electrification this decade. In our baseline scenario, based on BNEF and ICCT, we expect the share of electric new passenger vehicles (LDVs) to grow from 4% to 34% by 2030 (including a small share of plug-in hybrids). This means six million new EV sales by 2030, with large underlying differences from state to state, especially between rural and urban areas.

The total US rolling stock of over 242 million passenger vehicles in 2020 will still grow slightly going forward. In our baseline scenario, the current US EV fleet will expand to 27m by 2030, which comes to 11% of the total fleet. Plug-in hybrid vehicles are on the rise following the hybridisation of existing models, but this will probably stagnate after 2025 when full EVs gradually take over and gain more traction.

The US government aims to ramp up EV sales to 50% of total sales by 2030. This is a step up from the baseline scenario and matches the IEA’s sustainable development scenario. Nevertheless, as mentioned, several car makers are backing the ambition and there is interest among consumers. A combination of regulatory support with a wider range of affordable models could lead to an acceleration in EV sales in the second half of the decade.

A 'step up' scenario could result in almost 9m new EV sales by 2030 and a rolling stock of over 36m EVs (15% of the fleet)

The uptake of EVs this decade faces uncertainties and challenges which could influence the pace of change, despite PHEVs as an intermediate option. The most important are:

• Financial attractiveness – reaching breakeven
• Sourcing and production
• Charging infrastructure and upgrade of the grid

Costs remain an important factor for the uptake of EVs in the years to come. New subsidies mean that EVs might be financially attractive in specific situations, but future grants are uncertain. The cost of full EVs is expected to reach parity with ICE vehicles between 2025 and 2027 in Europe without subsidies, but in the US petrol is significantly cheaper, which could push back the breakeven point. Another risk is that battery prices won't continue to fall as before because of soaring demand for required metals like lithium, and growing scarcity.

US excise taxes on gasoline differ from state to state but are, on average, over four times higher in France and Germany.

Scarcity may also influence the pace of production growth. In 2021, car manufacturers struggled to keep up production because of semiconductor shortages. Going forward, battery sourcing may also become more challenging. Batteries are the engines of EVs, but supply is still highly dependent on a select group of countries. In response, car makers including Ford, Toyota, VW and Stellantis have announced plans to build (through joint ventures) battery plants in the US in order to secure more supplies.

Perhaps the most important factor for the uptake of EVs going forward is the development of charging infrastructure. More electric cars will require a much higher charger intensity, as car drivers need to be confident of sufficient charging capacity on the road. According to ICCT, the number of public level 2 chargers (<19,2 kW) would surge to 883,000 and the number of DC fast chargers (40-800 kW) to 177,000 in a scenario similar to our baseline (graph). In a 'step up' scenario, the number would be even higher. The Infrastructure Bill offers the opportunity to push the total number of chargers up to 500,000, but this is still far from enough.

The electricity grid will be put to the test by the bold expansion of charging infrastructure. According to some estimates, energy capacity will have to roughly double by 2050 if two thirds of the light duty vehicle fleet are electrified (including usage for other purposes). This means that utilities will need to invest billions to upgrade the grid (substations, transformers, grid feeders),with electric cars becoming part of the energy system.