Insight: Plug-in hybrids yet to gain a foothold in UK fleets

December 15, 2016

UK fleets remain overwhelmingly diesel-based (82%), despite the fact that electrically chargeable vehicles are reaching the point where they are competitive on costs. This is a problem that is affecting battery electric vehicles (BEVs), as well as plug-in hybrids (PHEVs). Both forecasters and manufacturers predict an overall decline in diesel sales and with the surrounding political environment being increasingly hostile to diesel vehicles, it is unlikely that this diesel dominance in fleets can continue. So what needs to be done to for PHEVs to gain traction? 

PHEVs have the edge over BEVs; they are not subject to the same lingering concerns over vehicle range and flexibility of use. UK government incentives cover up to 35% of the purchase price of a PHEV for private consumers, up to a maximum of £2,500 (€2,980). For company car users, a lower benefit-in-kind (BIK) ‘perk tax’ rate of 7% and lower company class 1A national insurance contributions (NIC) are estimated by Go Ultra Low to save a company more than £20,000 in tax over four years if they operate a fleet of just 10 vehicles. However, recent changes to the taxation regime in the UK mean that these tax breaks pale into insignificance against the tax savings that will be available from 2020, potentially discouraging fleets from buying PHEVs until that point. 

In addition to the list price incentive, there are a vast array of other potential savings that should give PHEVs an advantage in terms of total cost of ownership (TCO). These are outlined below: 

  • exemption from the congestion charge levied in London and a small number of other cities; 
  • exemption from the London Low Emission Zone surcharge; 
  • exemption from road tax (vehicle excise duty); 
  • free parking in some local authority areas; and 
  • support towards the installation of electric recharging points. 

So why are UK fleets not taking up PHEVs?

Although PHEVs still account for only a fraction of UK company car fleets, professional sales have been the biggest driver of demand. The 15,000 PHEVs sold to fleets between January and July 2016 accounted for 72% of overall sales. Data from Go Ultra Low shows that fleet sales of PHEVs grew by 45% in the first half of 2016. In fact, four of the five vehicles with the highest year-on-year growth in volume sales in Q2 were PHEV models but their penetration remains negligible. 

Tax breaks and incentives have rendered PHEVs more competitive with diesel cars on price, but the complications around the calculation of running costs are their Achilles heel. Arval highlights that fleets are struggling to integrate PHEVs into their choice lists, because of the difficulty in calculating TCO and CO2 output which vary significantly depending on how the car is driven. If the driver buys a PHEV and never charges the electric battery, the fuel costs will be much greater. The available incentives potentially stimulate this behaviour; there is little to prevent a driver buying a hybrid because of the discounted purchase price, but running the car as a typical diesel or petrol vehicle. 

Fleet consultant at Arval UK, David Watts, said: ‘A vehicle that operates part of the time on electricity presents a basic problem when it comes to managing business mileage costs, particularly for those organisations that currently utilise fuel cards. We certainly know of organisations which haven’t yet adopted their first plug-in hybrids or EVs fundamentally because of the perceived problems associated with the choice list and business mileage issue.’ 

He also points out that those responsible for creating the choice lists are ‘being asked to gain quite a lot of expertise quite quickly and, in many cases, they can’t differentiate between a traditional series hybrid and a plug-in hybrid vehicle, even though they have different operational and economic characteristics’. Therefore, even in fleets that desire to add more ecologically responsible vehicles, a need to add more flexibility into determining choice lists is required to boost the uptake of PHEVs. 

Incentives key for achieving price parity 

Figure 1 compares the new list price of key PHEV vehicles available in the UK to their diesel equivalents with a similar power output. In general, PHEVs are considerably more expensive than their diesel peers. For example, the Mitsubishi Outlander PHEV costs over €8,000 more than its diesel equivalent and the Volkswagen Golf GTE retails for €6,829 more than the diesel Golf. The exception is the petrol-electric version of the BMW 3-series, the 330e, which costs €3,222 less than the diesel version, the 330d. 

Figure 1: UK, list price of key PHEVs and their diesel peers, November 2016 

 

The £2500 incentive for private buyers and the 7% BIK for business users narrows the margin, but hybrids are still more expensive in most cases. The PHEV versions of the Volvo XC90 and the Mitsubishi Outlander both still cost over 20% more than their diesel counterparts for example. However, the current government subsidies do serve to make the playing field more level and the petrol-electric version of the BMW 3-series even more appealing. 

Residual value performance 

Given their higher purchase price, the PHEVs under review understandably have a higher residual value than their diesel equivalents (Figure 2) after 35 months and 45,000 km. However, considering the valuations as a percentage of their list price reveals that hybrids are depreciating more quickly. The Volvo XC90 hybrid retains 53.6% of its initial list price, giving it a trade value of €32,536 in November 2016, compared with a residual value percentage of 56.0% for its diesel equivalent. 

Figure 2: UK, trade residual values (36 months/45,000 km), November 2016 

The BMW 3-series hybrid devalues rapidly, ending up eight percentage points below its diesel cousin. The Mercedes C-class PHEV and Audi A3 Sportback PHEV, on the other hand, are notable for having a higher residual value percentage than their diesel counterparts. This results in a residual value percentage of 44.3% for the plug-in hybrid C-class compared to 40.1% for the diesel. At 45.2%, the Audi A3 Sportback e-tron PHEV is 1.4 percentage points ahead of the equivalent diesel variant. 

This variation in residual value performance reveals that fleet managers will have to be highly selective about the models they choose. The rapid rate of depreciation seen by some hybrids will have a significant impact on both leasing costs and total cost of ownership (TCO). 

Depreciation affecting TCO profile 

The typically higher levels of depreciation for PHEVs naturally have a significant impact on TCO. According to Autovista Intelligence’s sister division CarCostExpert, the Mitsubishi Outlander and Volvo XC90 PHEVs both have a TCO that is 24% higher than their diesel equivalents after three years and 45,000 km. This equates to additional costs of around €8,000 and €11,000 respectively. The TCO for the Volkswagen Golf GTE and Audi A3 Sportback e-tron PHEVs are, respectively, 16% and 15% higher than for their diesel counterparts and the Mercedes C-Class PHEV is just 7% greater.   However, in the case of the BMW 3-series, the TCO for the 330e is actually 12% lower than for the 330d.  

Figure 3: UK, TCO of key PHEVs and their diesel peers, November 2016 * 

 

* Includes the impact of incentives 

Plug-in hybrids remain a difficult proposition for fleets 

Incentives are helping to reduce the acquisition costs for PHEVs, but much more needs to be done if they are to become truly appealing to fleets. Their higher purchase price and rates of depreciation act as deterrents and real-world use is unlikely to match optimal usage patterns, making fuel costs higher than OEM figures suggest. Until fleets are confident that estimated running costs match the real-world situation and there is demonstrable TCO parity, PHEVs remain a difficult proposition. 






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