Market Analysis: The case for electric and hybrid vehicles in India

India National Electric Mobility Mission Plan 2020 envisages 5-7 million electric vehicles (EVs) will be on the roads by 2020. An opportunity for EVs in India exists in the nascent 4W market and it is driven by low hybrid/electric penetration, high oil price forecasts, and an unsaturated, growing demand for personal passenger cars. These ‘EVs’ refer to hybrids (HEVs), plug-in hybrids (PHEVs) and electric vehicles (EVs) ranging from 2 wheelers (2W) to passenger cars and fleet vehicles (4W). 

However, the demand for EV passenger cars remains weak as any potential fuel savings do not sufficiently compensate a consumer for a high purchase price. Meanwhile, the emissions-reduction case for EVs will not exist in India unless renewable energy is used to power EVs.

Electric transport agenda is being pushed by energy security and oil price concerns

The transport sector accounts for one-third of the total crude oil consumption and the road transportation accounts for more than 80% of this consumption. India’s consumption of crude oil continues to outstrip demand. The National Electric Mobility Mission Plan (NEMMP) expects that 92% of all consumed crude oil will be imported by 2020.  Electric transport is seen as a lever to reduce crude demand. EV uptake can help reduce overall oil deficit and/or re-direct crude to stimulate energy-intensive export sectors like mining, manufacturing, and agriculture.

FIG 1: Crude oil consumption outstrips production. NEMMP 2020 sees EVs as a way to reduce oil demand associated with the transport sector. 

The rising cost of petroleum products for the consumer will transition a shift to fuel efficient vehicles. Global crude price forecasts in USD (real) range from $120, $190 (base case) and $270. This will raise retail petrol prices from INR 67.24/L (2012) to INR 80/L – INR 132 /L by 2020 for Indian consumers.  Consumers have already started to shift to highly fuel efficient internal combustion engines (ICEVs), hybrid cars and electric two wheelers; while some municipal governments have explored electric-CNG hybrid fleet vehicles.  Further increase in fuel prices will strengthen the case for clean mass-transport options and stimulate demand for hybrid /EVs.

However, the current demand for electric vehicles in India is sluggish

Indian demand in the overall EV market is sluggish. High upfront costs and service anxiety around re-charging/maintenance facilities have been barriers to sales growth. Only 130,000 hybrid and electric vehicles have been sold in 2012, according to media reports. The market is dominated by two wheelers, with 97-98% of sales occurring for electric bikes, scooters and motorbikes. In the 4W market, the financial case for investing in HEVs/EVs is weak. The costs of energy storage technology need to decrease so that EVs can financially compete with fuel efficient ‘normal’ vehicles.  

The NEMMP target, of 5-7 million EVs by 2020, corresponds to penetration of EVs of 15% in 2W and 19% in passenger car markets.  This is ambitious, since sales have only grown at ~6%pa over 2008-12. For the largest segment, two wheelers, hybrid/EV penetration was estimated to be 1–2% of total 2W sales.

FIG 2A: Sluggish EV sales in India 2008-2012 (Source: Media reports; SMEV  press statements)

Several new 4W global manufacturers are intending to launch competitively priced hybrid EV passenger cars in India over 2013-2015, including Tata Motors. Currently, only Mahindra & Mahindra, and Toyota, provide electric and hybrid passenger car options. While some of these EV launches have been delayed or are being re-considered, there is still substantial change expected in the passenger car market in the short term.  

FIG 2B: Major Players in EV Market Segments – [Blue] indicates EV product exists in India; [Pink] indicates planned launch of EV product in India; [Grey] indicates international EV product but no India plans yet

Why the case for Hybrid, Plug in and Electric passenger cars doesn’t work in India…. yet

The upfront cost of EVs and PHEVs is difficult for a consumer to recover, despite receiving on-going fuel savings. As FIG 3 shows, a small low cost EV/ HEV is cheaper than a typical (medium sized) new car in India. However, in terms of size and functionality, a small EV cannot be compared to a typical Indian car. When compared with a small, highly fuel efficient car, such as a Tata Nano, EVs/ HEVs are more expensive to own. This is because the upfront costs of small EVs/HEVs, when compared to fuel efficient substitutes, are too high and cannot be recovered by fuel savings over their lifetimes.

The high cost EV, typically priced for the luxury market at INR 28-35 lakhs, is significantly more expensive than typical cars in India. The cost of EVs is primarily driven by the cost of energy storage. For pure electric vehicles, the battery cost alone can range between INR 250,000 – 600,000 – equivalent to the cost of buying a new, entry level fuel efficient ICE. 

FIG 3: Total cost of ownership for typical conventional cars, fuel efficient cars, HEV and EVs in India 

At present, the financial case for a consumer to invest in EVs is weak. Achieving fuel economy by investing in efficient ICEs, small hybrids, or 2W is the most likely response from the consumer if fuel prices rise.

Are EVS clean? Not in India!

Without improved grid performance, a greater share of renewable energy in power generation, and charging infrastructure, our analysis of the Indian market reveals EVs could potentially provoke greater carbon dioxide emissions.   The key reason is that 57% of electricity sourced from the grid India is coal based, so electric vehicles are substituting gasoline for coal to some extent.  Additionally, electricity losses during transmission and distribution are 24% (2012) compared to grid infrastructure in other countries (e.g. US grids can incur losses as low as 13-15%). Indian thermal plants emit a range of 783 – 1486 grams of carbon dioxide per kWH with an average of 990g/kWh.  This is twice as much as a typical UK thermal power plant at 544g/kWH. 

As per FIG 4, no net savings in emissions are realized for a small EV, when compared with a fuel efficient conventional car, unless the proportion of coal based generation (57%) reduces; no increase is seen for natural gas (9%); and wind or solar energy increases.  EVs only become viable if total coal and gas reduces from 66% to 45% of energy mix, with most of the reductions to come from a reduction in the use of coal.

One way for the market to overcome India’s coal-intensive energy mix for power generation is to encourage investment in charging infrastructure that, using scale, can use captive wind / solar power to recharge EVs. This will result in significant emissions savings. In the absence of captive infrastructure, investing in efficient grids, renewable energy, and fuel efficient ICEs or micro hybrids is the first logical step for India; rather than simply promoting the uptake of electric vehicles. 

FIG 4: Annual carbon emissions for electric vehicles, HEVs, and conventional cars* 

*Note: Based on 24% losses due to T&D; average emission in coal plants is 990g CO2 / kWH. Total emissions for a normal urban petrol vehicle, on average, are incurred mostly during combustion (79%). A small part can be attributed to the supply chain (21%). In the absence of Indian petroleum supply chain data, emissions in FIG 4 reflect additional 21% emissions due to petroleum supply chains for ICEs & HEVs based on US research. 

Incentives and subsidies

Initially, the Government of India backed EV sales by subsidising the purchase of electric vehicles. However, the industry did not see a growth in EV sales while the subsidies were in action. The withdrawal of the subsidies in 2012 led major decline in EV sales (up to 75% for two wheelers for some companies over one month), the closure of emerging EV manufacturing units and dealerships. Budget FY14 has not reinstated these subsidies.  An overview of subsidies and concessions is given below:

FIG 5: GOI Subsidies and Concessions

What will it take to bring clean cars to India?

Upfront cost of vehicles is a key barrier for consumers and manufacturers are keenly monitoring developments in energy storage that will help reduce this cost. In the absence of strong consumer demand, there is still an immediate need to reduce dependence on crude oil derivatives and to fulfil the transport sector vision outlined in NEMMP 2020. Governments bodies will need to:

Shift to renewable grid electricity and improve grid performance 

In the absence of captive power generation for charging electric vehicles, grid electricity will be used. In order to facilitate lower emissions, coal needs to be replaced by renewables such solar and wind for power generation to some extent – e.g. from 57% to 41%. Furthermore, the reduction of transmission losses (currently at 24%) and improvement in grid infrastructure will be required to support uptake of EVs.

Invest in captive solar/wind charging stations

This will require political will and government coordination. The experience of EV infrastructure development can be compared to experiences of other capital-intensive oligopolies, such as telecommunications and or ATM banking services in India. If the number of EV/PHEV players increase over 2013-15, it may be enough to subsidize some of the charging infrastructure, and provide policy certainty to the market – leaving large automobile manufacturers to plan, develop and roll-out infrastructure.

Aggressively pursue vehicle fuel efficiency

Ambitious targets incentivize the market to improve hybrid and electric vehicle technology. Bureau of Energy Efficiency’s Passenger Car Fuel Economy Ratings, for example, is a signal for manufacturers to continue to reduce fuel consumption of cars while creating a ‘demand pull’ from consumers through a star-rating system.  According to reports, these targets are not stringent enough. In 2011, BEE standards correspond to a rate of reduction in fuel consumption of 1.28% per annum, which is below what is observed over 2006-2010 for the automobile industry (2.8% pa improvement over 2007-10) and below global targets of 2-4%. However, BEE is considering to set fuel efficiency standards for passenger cars in 2017 and 2022 that represent a 20% improvement in mileage by 2020. Furthermore, BEE may implement a corporate average fuel efficiency system, which measures efficiency as a weighted average over all types of cars sold by a company in one year. 

Ensure Perform, Achieve, and Trade (PAT) Scheme drives sector-wide energy efficiencies in second cycle

Initial reports suggest that the second cycle of PAT (commencing 2015) could include transport supply-side sectors (such as refineries, electric transmission companies, with thermal power already included in the first cycle) and transport demand-side sectors (such a railways, aviation and buses).  If so, then for the first time, market mechanisms will be able to recognize and act on energy efficiency benefits across the whole transport supply chain. This will help incentivise electrification of road transport and ensure electric vehicles do not generate unintended environmental impacts.