The Government’s new benefit-in-kind tax rates, offering a zero-rate for full electric vehicles in 2020/21, should drive a new wave of pure electric cars being taken up by business users. 

So should fleets examine their vehicle replacement cycle for these cars because of the rapid pace of change for EVs?

With every new electric car seemingly promising greater range and better technology than its rivals or predecessor, will there be a corresponding negative shift in residual values for these cars? And if so, how can fleets adapt so they don’t lose out?

Typically, companies will have a fleet vehicle cycle that’s either three or four years long. That’s been fine for years. Different petrol and diesel cars have depreciated at different levels, but on the whole, the shape of the depreciation curve has remained the same. This is because, historically, each model has been replaced with a better, slightly more efficient, new one (facelift around year three, all-new after year five or six) but the one thing that didn’t change was how far the car will go and, within reason, how suitable it was for the task.

With fully electric cars we’re not at that stage yet. The technology is still in its infancy and the changes aren’t gradual. Instead the improvements are much larger and, with few exceptions (the Nissan Leaf), most pure EVs are still on their first-generation model.

Coffee With - Rupert Pontin, director of valuations, Cazana

Rupert Pontin, director of valuations, Cazana

Cazana’s insight director Rupert Pontin (pictured right) believes fleets should look at contract length if they’re running, or thinking of running, pure EVs.

“When the EV range reaches a 300-400-mile consistent range, then that’s okay for a rep. And when this is coupled to fast re-charging then you’re looking at more stable residual values,” he said.

“But until then, a shorter cycle is best. Fleets will want to turn their EVs faster to sell them to the consumer faster,” he added.

“Currently, ranges keep on getting better. In other words, the next newly announced electric car is always getting better than the last.”

James Bisatt, UK forecasting manager at Cap HPI, agrees that the pace of change for battery technology will have a negative impact on residual values, but disagrees with Pontin’s assessment of how to mitigate the RV impact: “The financial depreciation for electric vehicles remains much higher than that for comparable ICE vehicles, even with the plug-in car grant and despite an improvement in recent years. It already makes sense to run battery electric vehicles over a longer contract to reduce depreciation costs.

Residual Value for EV's generic article image“We are already building in the impact of model ageing into our Gold Book forecasts, which include the improvements in battery technology. We expect fleets to be already be taking this into account, either by referencing our forecasts or doing similar through their RV setting processes.

“There should be no requirement to reduce replacement cycles because of the impact of battery technology improvements, as it should already be taken into account in the RV.”

Credit rating agency Moody’s, which assesses the finances of many car leasing operations, believes there’s an additional risk within this arena.

In a recent report on the sector, Moody’s highlighted risks that are outside the control of the lease company, such as changes in government policy. While these changes are more likely to impact petrol and diesel cars as politicians try to reduce carbon emissions, it’s also possible this could affect new technologies as well, either via intended or unintended consequences.

However, Pontin believes that diesel residual values should remain strong until the mid-2020s as slower new diesel demand means that supply into the used car market will also decline and keep values strong. “In this case, a longer contract would be better,” Pontin said.

The other possible impact on residual values for electric cars could come from the technology itself. If battery range reaches a point where most EVs on sale are capable of 300-400 miles between charges and they are used to cover higher mileages, then fleets could find themselves reaching the outer limits of the mileage warranty within longer contracts. And in the unlikely event of a battery pack needing to be replaced, it could cost thousands to do so.

In the longer term, Cap HPI’s Bisatt points out the cost of ownership burden will continue to reduce for BEVs: “The further improvement in depreciation will happen as the used EV market matures and unjustified concerns about battery reliability fade. The growth in charging infrastructure and manufacturers introducing lower-priced models will also have an impact.

“Further improvements will be seen in running costs due to lower SMR expenditure, and potential benefits such as free parking, which may be introduced by some cities. If we assume £7 per day, five days-a-week for 46 weeks, then free parking for a BEV would be worth more than £1600 a year.”

He adds that perhaps the best option currently is plug-in hybrid electric vehicles which “do not incur the same level of high depreciation as BEVs, so are more suited to traditional replacement cycles, and this will remain the case”.

Tristan Young