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Cleantech matters: EVs in commercial fleets: accelerating transportation electrification - EY - Global

Cleantech matters: Seizing transformational opportunities

EVs in commercial fleets: accelerating transportation electrification

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Deb Frodl Bryan Hansel

Mike O'Connell John Schaaf

Over the next five years, electric vehicles (EVs) are expected to account for a growing portion of overall vehicle sales. This transformational change in the industry cuts across many sectors and will require new business models and new partnerships.

One key subsegment of the vehicle market is already showing growing adoption and is anticipated to continue as a catalyst for market growth: the application of EVs in commercial delivery fleets.

To better understand this new market, EY’s Global Cleantech and Automotive Centers assembled a panel of leading experts to discuss some of the key issues. Highlights of the discussion follow.

Scott Sarazen: Mike, could you share with us the motivation that led Frito Lay/PepsiCo to purchase 176 electric vehicles for your commercial fleet?

Mike O’Connell: We have set some very aggressive goals to reduce our environmental footprint with a strategy we call "The Promise of PepsiCo." One part of it is a focus on running our fleet operations more efficiently. When we introduce any new vehicle technology, we have to ensure that our sales force can deliver products to our customers each and every day.

We look at the power train and the business benefit associated with that vehicle. With EVs, it is a win-win — meeting both our business needs and significantly improving our environmental footprint. Our introduction of 176 Smith Electric vehicles will take a half a million gallons of diesel fuel out of our fleet next year. So it is a big win for us.

Jeff Henning: Bryan, as you speak to customers in different markets, what has been most surprising about their perceptions of electric vehicles?

Bryan Hansel: Customers are initially shocked that reliable electric trucks are already in production and ready for delivery. A lot of people perceive EVs as being in the future or envision them as golf carts. So having a truly full-size, operating utility vehicle available and in production today is a surprise.

We have built a vehicle to a specification such that whether you are driving a diesel truck today or you are driving electric, you are not changing your operation. We feel it is critical that our customers not be required to change their business to adopt this technology.

We also find a good deal of surprise when we discuss the financial questions — people don’t fully understand the level of impact. True, there are capital premiums, but there are meaningful operational savings that enhance the affordability of the technology.

When we talk to the drivers, the biggest "ah-ha" is that frankly, it is not a lot different from a traditional vehicle other than that it doesn’t make a lot of noise, it doesn’t pollute and it doesn’t get fueled the same way. They love driving the vehicles.

Scott Sarazen: Mike and John, let’s dig in a little deeper on this cost-of-ownership question. How did Frito Lay and other similar customers approach the economics of EVs?

Mike O’Connell: Whenever we are looking at replacing vehicles, we look at all the available solutions — their current cost and benefits, including total cost of ownership. Things like maintenance, fuel economy, tires and brake wear are compared with our fleet profile.

When we buy replacement vehicles, we expect a certain level of investment and return. With emission standards tightening and fuel prices continuing to escalate, the economic decision to switch to EVs is becoming easier. The benefits of operating an electric vehicle far outweigh the associated up-front acquisition costs.

John Schaaf: Certainly, economics are a tremendous factor, as are the specific infrastructure challenges. So I would first answer that question as a fleet operator. Analyze your current operation to determine the sweet spots in the fleet where, given the current economics and constraints, there is an opportunity for some level of EV penetration. There is a place within most fleets where the economics do work — it is very much a business decision.

Jeff Henning: Deb, considering the higher up-front cost, are there new financing models that companies are using for these vehicles? Are fleet operators gravitating toward leasing?

Deb Frodl: Absolutely. One of the things we are seeing in the early days of this transformation is a higher propensity to lease electric vehicles because of the higher capital cost. And the lease gives the customer more flexibility in the amortization of that vehicle, so we are seeing customers asking more about leasing because there is more pressure on the capex budget.

With prices where they are today, customers are less able to buy vehicles or replace as many as in previous years, and leasing gives them more flexibility. We are also being asked about new and unique models for financing the battery separately from the vehicle. We are in the early stages of exploring these options and solutions, and if there is a demand for battery financing solutions, we will look into it more.

Here in the US, we typically have open-ended leases where customers carry the burden of the upside or downside of the residual. In other regions — Europe, Australia and Japan as examples — GE holds that residual risk. This is a new market and a new technology and, as such, there are new business models being contemplated. But we are starting to see customers deploy, and there is definitely a level of interest in every region.

Jeff Henning: As you look at the market and think about potential residual values associated with EV batteries, how do you see them affecting the holding period or your economic modeling?

Deb Frodl: Residual values are a very important element when you are looking at total cost of ownership. This is an emerging industry and there are a lot of unknowns. We now have five years of experience with hybrid electrics. We have seen that those residuals out-performed and stayed strong. Using what we’ve learned, we are now working through comprehensive total cost-of-ownership models for EV customers.

Mike O’Connell: At Frito Lay, we own and operate all of our vehicles and look to maximize the life of an EV. We anticipate 10 years for the chassis and at least 5 years, maybe 7 or 10, for the batteries. With the next generation of EVs, we expect there will be a secondary market that will start to stabilize residual values and provide a variety of solutions to help different-sized companies make the economics of EV adoption work.

Bryan Hansel: There are some unique things about an electric vehicle that affect useful life. There is a very long life expectancy. There are only two moving pieces with an electric motor, and there is no transmission, no fuel system and no exhaust system. A lot of the costs that impact a vehicle as it ages, and that would drive down residual value because of replacement costs, simply don’t exist.

Fast forward five years and I can argue that the vehicle is not even halfway into its life because the power train, which tends to take trucks off the road, isn’t a factor here. And the used truck is still going to be 80% cheaper to operate. Even if we put a new set of batteries in it in year five, the customer effectively has an almost-new vehicle that will provide a lot of operational savings.

Scott Sarazen: John, considering that JCI has building management and other potential battery applications, do you see a secondary market for batteries that might improve the potential residual value?

John Schaaf: The unknown is, of course, what those batteries could be used for and how to set the potential value. There have been a lot of pilot projects and a number of different uses. At Johnson Controls, we are looking at other applications to determine what that market might be. I agree with Bryan that in a commercial fleet, the vehicles will last longer. It is starting to look like the airline industry, where they refresh the plane with a new power plant.

Jeff Henning: Mike, where is Frito Lay/PepsiCo experiencing value creation resulting from the introduction of EVs to your fleet?

Mike O’Connell: We have experienced operational improvements associated with reducing fuel purchases and the associated repair and maintenance. There are also both internal and external interest and excitement from delivering our products in an EV that directly supports our core business strategy around sustainability, which is helping fuel productivity and improving our environmental footprint.

For example, we are looking to potentially tie in one of our facility solar projects with the EVs and charge the vehicles off the available solar power. Today’s consumers are very interested in what we are doing as an organization — not only in the product we are selling them, but in what we are doing for the environment and for the community.

Scott Sarazen: Can EVs compete without government subsidies in the short term, and when will we reach a tipping point where adoption will grow even if subsidies are removed?

Bryan Hansel: At Smith Electric, we received a Department of Energy grant to put a demonstration fleet into the market. Frito Lay is a part of this, and we are gathering data that will help the Department of Energy assess this strategy. We also used this grant to help cushion some of that up-front capital cost for our customers. know we can get to a price point that works for our customers even without subsidies.

Deb Frodl: Government funding has had a substantial impact on the supply side; we now need to make sure that there is an appropriate demand side as well. The operational savings are there and we don’t have to convince fleet managers of that. The initial up-front costs remain an issue — subsidies help drive adoption, especially as orders reach 100 to 200 vehicles. So I think it is important to have these programs as we enter this new industry and this new phase.

Mike O’Connell: It was critical to us that we could apply this technology over the long term. We were not interested in buying these 176 vehicles and stopping. We considered not only how the industry could evolve from a supply chain and cost profile, but what we could do as an organization. We approached this as a partnership with suppliers, government agencies and our own organizations and believe the cost curves can come down if we all work together.

If Bryan is trying just to take cost out in a supply chain, he may not get there alone. But in my route profile, I may not need an 80-kilowatt pack on every truck. Together, we can partner to rightsize the demand and develop the industry while also making it a good value proposition. We feel strongly that there is going to be a business proposition without subsidies in the future.

John Schaaf: There is an awful lot of work being done by the battery suppliers to drive down cost. At Johnson Controls, we are spending a lot of time on potential cost reductions. The biggest, most immediate battery cost reductions will result from scale — government subsidies help significantly in terms of customers being able to purchase more units. We also recognize that it is going to take technological advances to improve battery performance and lower costs.

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