The economic case for fleet electrification
August 22, 2024
Fleet electrification has long been viewed as a vital component of reducing an organization’s carbon footprint while increasing its ESG score. While many business leaders recognize the environmental benefits of electric fleets, there’s a lesser-known yet equally persuasive cost-efficiency case for fleet electrification.
According to findings from McKinsey & Company, certain light-duty vehicle applications are already achieving total cost of ownership (TCO) parity with internal combustion engine (ICE) vehicles. By 2025, many more are expected to follow suit, with medium and heavy-duty vehicles not far behind by 2027.
This TCO new world order represents potentially counterintuitive reasoning for fleet and business leaders. They should not transition to EVs despite the economics—they should transition because of it. In this article, Element Fleet Management’s trusted advisors explore both the readily apparent and less apparent economic drivers behind the shift to electric fleet vehicles.
Electric vehicle fuel and maintenance – the low-hanging fruit
One of the most immediate financial benefits of switching to an electric fleet is the energy efficiency gained. Electric vehicles convert a higher percentage of their energy source into motion, minimizing energy waste. This efficiency reduces operational costs and contributes to the cost-effectiveness of running an electric fleet.
Fleet electrification’s consistent, low-cost electric "fuel"
Despite periodic fluctuations, electricity costs tend to be more stable than volatile global fuel prices. On an e-Gallon basis, electricity remains substantially cheaper than gasoline or diesel. A study by the University of Michigan’s Transportation Research Institute found the annual cost to “fuel” an EV was $485 a year, compared to $1,117 for an ICE vehicle. According to real-world data by the Department of Energy (DOE), EVs are 2.6 to 4.8 times more efficient per mile than their ICE counterparts.
Fleet electrification's lower maintenance expenses
Based on Element Fleet Management's EV maintenance analysis, light-duty EVs typically require 40% less maintenance spending compared to ICE vehicles. This is due in large part to fewer trips to the dealership for services such as oil and filter changes. With EVs, regular maintenance will involve twice-a-year tire rotations which is not as costly as preventative ICE vehicle maintenance.
Another important maintenance cost-efficiency factor is the regenerative braking technologies in EVs. Regenerative braking reduces brake pad friction, leading to fewer brake replacements and fewer particulate matter emissions to the atmosphere.
"Quite often, with light-duty vehicles, the savings are significantly more and much sooner than people realize,” said Reid Stewart, an EV Project Specialist at Element. “It's not five years down the road; it's often in the first few months when the monthly vehicle payment, energy cost, and maintenance costs are added up versus the same cost pillars for an ICE vehicle."
Fleet electrification other key economic drivers
The financial case for EVs doesn't stop at fuel and maintenance savings. Several other economic factors can make the transition even more attractive for businesses.
Government, ESG, and industry incentives
In the interest of accelerating carbon reduction around the world, governments are offering various incentives to encourage EV adoption. In Canada, the iZEV program provides up to $5,000 at the point of sale for light-duty ZEVs. Similarly, the U.S. Inflation Reduction Act offers federal incentives of up to $7,500 for EVs through 2032. These federal incentives, along with provincial, state, and or municipal incentives in various jurisdictions, can significantly offset the initial cost difference between EVs and ICE vehicles.
“An EV that costs $10,000 more than an ICE vehicle can quickly get to cost parity when you have a $7,500 federal tax credit,” said Element Strategic Consulting Manager Rob Bradley.
A higher Environmental, Social, and Governance (ESG) score can be incredibly helpful in accessing government incentives and improving credit ratings. These will, in turn, go a long way to improving operational budget management.
Fleet Electrification compliance benefits
Transitioning to an electric fleet can help businesses avoid compliance penalties associated with emissions regulations. A sudden shift to meet mandatory requirements can be costly and disruptive. By proactively adopting EVs, organizations can stay ahead of regulatory demands and secure long-term compliance.
Averting the ‘Osborne-lite’ ICE resale crash
The Osborne effect refers to the phenomenon where customers defer purchasing current products in anticipation of future releases. It refers to the early 1980s example of Osborne Computers prematurely promising the upcoming release of newer models, which led to customers delaying purchasing new units of their current model. When the newer models didn’t hit the market as promised, Osborne’s sales plummeted, and the company went out of business.
In the automotive industry, a similar, but not exact, scenario is developing as consumers hesitate to buy new ICE vehicles, anticipating EV price reductions.
“We’re on a massive exponential growth curve in Canada where we’re seeing EV ownership double every two years. We’re at 15% now, so by 2028, that would put new EV sales penetration at 60% of all light-duty vehicles sold in Canada,” Stewart said.
This shift in consumer behavior threatens to devalue ICE vehicles, impacting their resale value and overall TCO.
The time to act
The case for fleet electrification extends far beyond environmental considerations. For fleet managers and business leaders, the transition to electric vehicles presents a unique opportunity to enhance operational efficiency and financial performance. By focusing on the economic benefits, organizations can make informed decisions aligning with their sustainability goals and bottom line.
Now is the time to explore the potential benefits of EVs for your fleet. Contact Element’s team of trusted advisors today to learn more about how they can assist you in making this transition seamlessly.
