A new business model for encouraging the adoption of electric vehicles in the absence of policy support

Applied Energy 235 (2019) 1106–1117

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Applied Energy journal homepage: www.elsevier.com/locate/apenergy

A new business model for encouraging the adoption of electric vehicles in the absence of policy support

T

⁎

Victor Niana, , M.P. Haria, Jun Yuanb a b

Energy Studies Institute, National University of Singapore, Singapore China Institute of FTZ Supply Chain, Shanghai Maritime University, China

H I GH L IG H T S

business model for electric vehicles without policy support is developed. • AThenewmodel inspired by post-paid telecom mobile device purchase discount. • The model ismakes electric vehicles cost competitive in the worst market environment. • The model can benefit all stakeholders in the ecosystem of electric vehicles. •

A R T I C LE I N FO

A B S T R A C T

Keywords: Electric vehicle Total cost of vehicle ownership Business model Dealer-buyer cost sharing Worst case market environment Transport policy

The developments in electric vehicles (EVs) are driven by the need for cleaner and more efficient road transport. Despite the benefits of electrifying the transport sector, both EVs and internal combustion engine vehicles add to road congestion. Major cities around the world have thus employed vehicle control measures to rein the growth rate of vehicle populations. In the case of Singapore, heavy taxes are levied onto the purchase price of all vehicles registered and sold in the country making it literally the most expensive city to own a car. EVs are also penalized under the taxation scheme implemented in Singapore. The vehicle taxation schemes and the absence of incentive measures for EVs make Singapore the worst-case market environment for EV adoption. Through a dissection of Singapore’s vehicle control measures, a new business model is proposed for promoting the adoption of EVs under Singapore’s market environment. The proposed business model, inspired by telecommunication companies' mobile phone purchase contract aims at reducing the upfront purchase price of EVs via quasi-discount by vehicle dealers without affecting the transport sector tax revenues. Under a contractual arrangement over usage and electricity tariff managed by vehicle dealers, EV buyers effectively pay back the discounted upfront cost over a fixed period of time. Through an examination over a range of repayment periods and their impacts on costs, we find that the repayment period has virtually no impact on the total cost of vehicle ownership. We further contemplate that the same business model can be applicable to all cities in promoting the adoption of EVs without affecting the existing policy infrastructure.

1. Introduction The developments in electric vehicles (EVs) are driven by the agenda of cleaner and more efficient transport. According to the International Energy Agency (IEA), the avoided carbon emissions due to the deployment of EVs are about 29.4 million tonnes worldwide when computed using the average grid carbon emission factor of each

country in 2015 [1]. The fuel economy of EVs is much better than that of internal combustion engine vehicles (ICEVs) when measured by kilometers per unit of energy consumed, but EVs suffer much greater constraints in terms of total mileage and refueling time as compared to ICEVs. The power density of currently available battery storage technology is much lower than that of gasoline or diesel. The time taken to fully charge an EV is many orders of magnitude longer than to fully

Abbreviations: ARF, additional registration fee; CEVS, carbon emission-based vehicle scheme; COE, certificate of entitlement; EMA, Energy Market Authority (Singapore); EV, electric vehicle; GST, Goods and services tax; ICEV, internal combustion engine vehicle; IEA, International Energy Agency; LNG, liquefied natural gas; MOPS, Mean of Platts Singapore; MTI, Ministry of Trade and Industry (Singapore); OMV, open market value; RF, registration fee ⁎ Corresponding author. E-mail address: [email protected] (V. Nian). https://doi.org/10.1016/j.apenergy.2018.10.126 Received 16 August 2018; Received in revised form 3 October 2018; Accepted 28 October 2018 0306-2619/ © 2018 Elsevier Ltd. All rights reserved.

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studies exploring the viability of business models in the worse-case scenario. In other words, existing studies have only covered markets with specific government supports for EVs or other clean vehicles. In response, we propose a new business model for promoting EVs in cities without policy support taking into consideration the different interests among vehicle dealers, buyers, and the government in the life cycle of vehicle ownership using Singapore’s market situation as an example. The rational for selecting Singapore’s market condition is to critically challenge the viability of the proposed business model in the least supportive environment. The development of the proposed business model is inspired by post-paid mobile phone purchase contract practiced by telecommunication companies. The proposed business model aims at addressing the high upfront purchase price of EVs while assuring profitability to the dealers and tax revenues to the government. Similar to the mobile phone contract model, the proposed business model is generic to all market environments and can be widely applicable to cities and/or countries to aggressively promote the adoption of EVs. The Singapore case study demonstrates that the proposed business model can address the interests of all relevant stakeholders in the society even under the least supportive policy environment. However, cooperation among vehicle dealers, electricity retailers, and infrastructure developers under the guidance of the government is a critical success factor. Although the inspiration of the proposed business model comes from a proven business model, we would like to caution that the proposed business model has not yet been demonstrated in commercial practice and that the viability and wide applicability of the proposed business model are only demonstrated in a theoretical construct in this paper.

refuel an ICEV. With the current state of developments in technology and infrastructure, installation of dedicated chargers for EV owners at home and/or office is almost an absolute necessity. Moreover, the manufacturing cost and hence the sales price of EVs are higher than those of ICEVs mainly due to cost of batteries. All of these bottlenecks in technologies suggest supportive policies as an instrumental factor to drive the adoption of EVs. However, the promotion of EVs’ adoption would add to more congested road traffic. Major cities conscious about easing road congestion have already put in place measures to slow the adoption of vehicles, especially ICEVs. Cities like Beijing employs a balloting scheme to restrict the number of license plates released in each period (monthly) and a road space rationing policy to allow only cars with even or odd number of their license plate on the road each day. However, these restrictions are only imposed on ICEVs. As of November 2018, EVs are still exempted from these restrictions in Beijing. In addition, EVs may further qualify for a rebate from government in the form of upfront reduction of the purchase price. Other cities like Singapore employ a fee or tax-based scheme in which the government imposes heavy taxes on vehicles including both ICEVs and EVs. In addition to those taxes, Singapore also employs a “Certificate of Entitlement” (COE) scheme in which prospective vehicle buyers bid for the right to own one of a few license plates released each quarter. The COE restricts the lifetime of a vehicle to a maximum of 10 years from the date of the vehicle’s first registration in Singapore. In many instances, the price of the COE is higher than the price of the car after tax. As shown in Fig. 1 (drawn based on data published in [2;3]), the sharply rising COE premium between 2009 and 2012 has substantially restricted the growth in vehicle population in Singapore. On 23 October 2017, Singapore Land Transport Authority has announced a “zero-growth” policy from February 2018 aimed at eliminating the growth of vehicle populations in Singapore [4]. Fuel is generally the next important cost component upon purchasing of a car. The gasoline and diesel prices are usually regulated by the government. The electricity price, however, could be determined in a way by the demand and supply in a liberalized market or determined by the government in a regulated market. Singapore has decided to fully liberalize its electricity market by 2018 [5]. The added contestability through the liberalization of the retail market could mean more competitive electricity prices for EVs and potentially more flexibility in charging arrangements. While technology innovation could help address the need for cleaner and more economical cars, the mass adoption of EVs would not be achievable without an appropriate business model to address the objectives of all stakeholders in the society. Existing studies on encouraging the adoption of EVs tend to focus exclusively on policy and holistic business models. Although there are studies aimed at addressing the upfront purchase cost and innovating the business models of vehicle charging, there is a general lack of such

2. Literature review 2.1. Policies and business models Majority of policy-oriented studies on EVs are conducted through cost-benefit analysis. Jérôme [6] proposed a simulation model to examine the cost-benefit of EVs in Germany taking into consideration European Car Average Fleet Emission regulation. Oda and others [7] conducted a cost-benefit analysis from the perspective of social cost taking into consideration congestion due to queueing at charging stations. A cost-benefit analysis for plug-in EVs in Michigan, USA and found that the penetration of EVs could lead to cost savings for Michigan vehicle owners, reduced electricity bills for utility customers, and reduced carbon emissions [8]. Colmenar-Santos and others [9] conducted a cost-benefit analysis for plug-in EVs in the context of an island taking into consideration the use of EVs as storage systems for the integration of intermittent renewable energy sources and demand management.

Fig. 1. (a) Private vehicle populations in Singapore from 2006 to 2016; (b) annual average COE premium. 1107

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Table 1 Typical cost breakdown of vehicles sold in Singapore by body type in March 2017 (Unit: 2017 Singapore Dollars). Vehicle Body Type

OMV

GST & Exercise Duty

RF

ARF

CEVS (Rebate)/Surcharge

COE (March 2017 1st Bidding)

Total

Hatchbacks Sedans Large Sedans Small SUV/MPV SUV Sports Car Luxury Hatchbacks Luxury Small Sedans Luxury Sedans Luxury Large Sedans Luxury Small SUV/MPV EV Tesla `EV Japanese EV European EV Chinese

20,472 18,215 27,291 22,444 26,592 34,306 25,873 26,385 36,174 58,684 43,511 133840 39137 40547 39986

5814 5173 7751 6374 7552 9743 7348 7493 10,273 16,666 12,357 38010 11114 11515 11356

140 140 140 140 140 140 140 140 140 140 140 140 140 140 140

21,241 18,677 30,279 23,761 29,320 40,028 28,223 28,939 42,664 79,009 54,341 212912 46791 50188 47980

(8658) (4335) (2222) (2906) 833 7500 (6875) (8750) (3947) (3 1 3) (2 2 7) (30000) (30000) (30000) (30000)

51,364 51,004 52,882 51,996 52,882 53,300 52,045 51,417 52,904 53,300 52,958 53300 50789 53300 50789

90,372 88,874 116,120 101,810 117,319 145,016 106,753 105,623 138,208 207,487 163,079 408202 117971 125690 120251

competitiveness of EVs. While the incumbent and entrepreneurial firms’ path dependencies could impact the business model evolutions in the EV industry as discussed in [24], there are no studies focused on business models to address the upfront purchase price of EVs. In this study, a new business model conceived through a dealer-buyer costsharing scheme along the lines of a post-paid mobile device purchase arrangement practiced by the telecommunication industry to alleviate EV’s cost disadvantages. We further test the viability of the proposed business model using a worse-case market environment (scenario) for EV deployment. As reviewed in Section 2.2, this conceived worse-case scenario features the absence of supportive policy framework and the presence of monetary measures for reining vehicle population growth (such as the COE in the case of Singapore).

On business model, Weiller and others [10] developed four case studies to examine four different business models employed by four EV manufacturing companies, namely, BYD, Wanxiang, Tesla, and Autolib’ (Bolloré). These business models include EV leasing, battery swapping, and car-sharing schemes. Kley and others [11] employed a wholesystem approach in developing business models taking into consideration the characteristics of vehicles, batteries, infrastructure, and system services (such as load shifting and back-feeding power) for various stakeholders. A study by Christensen and others [12] argued that the combination of radically different technologies and a highly complex multi-agency operating environment can theoretically provide the conditions required for such an emergent business model as proposed [11] in to function. Li and others [13] examined interactions between enterprises and governments along the value chain of electric vehicles in the bus and taxi fleets. Their results showed that cooperation between the private and public sectors has an important role in EV adoptions. Particularly on EV charging, analyses by Madina and others [14] showed that access to private home charging are expected to be a strong driver for EV adoptions as long as owners can cover high annual mileages, charge their EVs at lower prices overnight and benefit from subsidies for EV purchase. San Roman and others [15] proposed a regulatory framework supporting alternative charging methods such as home charging, on-street public charging, and dedicated charging stations. Their results showed that sophisticated business models (such as electricity purchase contract and vehicle-to-grid applications) can be established by introducing EV aggregator and charging manager as additional agents in the EV market. A study by Bessa and Matos [16] further confirmed the role of EV aggregators in supporting the vehicleto-grid applications and business models. On cost of vehicle ownership, He and others [17] proposed a pricing model of alternative fueled vehicles from the consumers’ perspective taking into consideration the upfront purchase cost, operating costs, fuel cost and other costs over the life cycle of vehicle ownership. Their findings suggest a critical sales price below which EVs can become costcompetitive from the perspective of life cycle cost. Shepherd and others [18] examined factors such as subsidies, fuel economy, access to charging points, carbon emissions and revenue preserving tax. Their findings suggest that supports from EV manufacturers are as important as purchase price incentive [19], subsidies [20], and rising oil prices [21]. While subsidies for reducing the upfront purchase price of EVs are important as also suggested by [22], the study by Bubeck and others [23] further suggests that technology innovation and significant cost reduction in batteries are important in improving the cost-competitiveness of EVs. Findings from our literature survey suggest that existing studies tend to focus exclusively on policy incentives for addressing the cost-

2.2. Singapore vehicle tax structure A complex tax structure is applied to all cars sold in Singapore [25]. First, the open market value (OMV) is assessed by the Singapore Customs, taking into account manufacturing, freight, insurance and all other costs incidental to the sale and delivery of the car from country of manufacture to Singapore. Next, a flat S$140 registration fee (RF) and an additional registration fee (ARF) pegged to the OMV, and a Goods and Services Tax (GST) are added to the OMV. Third, an exercise duty at 20% of the OMV is further added. Last and the heaviest tax, the COE which is determined through a bidding exercise is added to make the final purchase price of the car. The bidding exercise is grouped into two categories for private vehicles, namely Category A for engine capacity of 1600 cc and below and Category B for engine capacity of larger than 1600 cc. In addition, Singapore also has a carbon emission-based vehicle scheme (CEVS), which translates to a rebate or surcharge to the total purchase price of a car. Table 1 presents a typical breakdown of the purchase prices of private cars based on the price information of 305 models of ICEVs, currently on sale in Singapore [26] and the estimated prices of EVs based on retail prices in their source countries together with applicable tax and duties as if imported into Singapore. This is because the OMVs are not published for EVs in Singapore market. The total upfront purchase cost or the capital cost is multiple times the OMV for each vehicle type with more powerful and/or more expensive vehicles taxed more than cheaper and/or less powerful vehicles. In addition to the purchase price, car owners pay for fuel and maintenance during the service life of a car, which is restricted to 10 years in Singapore. EV owners may also need to pay for the installation of EV charger at home and/or office.

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purchase subsidy of 14 million South Korean Won is given to EV buyers. In addition, EV owners can also benefit from reductions in tax surcharges, insurance premiums, expressway tolls and parking fees.

Table 2 Incentives for the adoption of EVs in China in 2017 (Unit: 2017 RMB). Mileage on a single full charge

Rebate

Upper limit of incentives for local government

100 to 150 km 150 to 200 km Greater than 250 km

20,000 36,000 44,000

No more than 50% of incentive amount provided by central government

2.3.6. The USA The USA granted tax credits for EVs valued between US$2500 and US$7500 depending on battery capacity in 2009 [33]. By 2014, more than 37 states have established incentives and tax exemptions for EVs. Other incentives such as free parking and high-occupancy vehicle lane access are also given to EV owners. In addition, the government has also pledged grants for technology development, production of new EVs, and installation of EV charging infrastructure.

2.3. Incentives by countries Several countries have already put in place incentives to encourage the adoption of EVs. This section provides a brief review of the incentives given in major EV markets including (alphabetically) China, France, Germany, Japan, South Korea, and the USA. All of these policies are targeted exclusively at the upfront purchase price of EVs.

3. Methodology The ecosystem of EVs involves multiple stakeholders in the society including the vehicle dealer, buyer, electricity retailer, and the government. The objective of any business model is thus to theoretically address the interests of all stakeholders simultaneously. In the case of EV, the key is to address both the upfront purchase price and the need to curb vehicle population growth while satisfying tax revenue streams. Inspired by the post-paid mobile phone purchase contract offered by telecommunication companies, we propose a generic methodology for analysis of EVs’ commercial viability when there is minimum or no policy support to encourage their adoption. This methodology features a new business model for promoting the adoption of EVs by lowering the upfront purchase price for buyers and maintaining (potentially improving) profitability for dealers and tax revenue streams for the government.

2.3.1. China In order to increase the market share of EVs so as to reduce carbon emissions, the Chinese government announced a trial program on 1 June 2010 to provide incentives for the purchase of EVs [27]. The amount varies according to the mileage on a single full-charge of the vehicles as shown in Table 2. These subsides are paid directly to automakers while it is expected that consumers can also share the benefits by purchasing EVs with reduced prices. These incentives are provided every year. 2.3.2. France France has established a bonus-malus system to provide incentives for the purchase of EVs since 2008 [28]. The bonus amount changes every year. In 2017, France proposed to provide the €10,000 superbonus to encourage the scrapping of more than 10-year old diesel vehicle. The bonus for the purchase of an EV is €6000, which was decreased from €6300 in 2016. However, the additional scrappage bonus has increased to €4000 from €3700 in 2016.

3.1. Capital and other fixed costs of vehicles Capital cost refers to the cost of purchasing and registering a car. In a heavily taxed country like Singapore, the capital costs of vehicles are much higher compared to those in other countries primarily due to the COE and registration fees. Vehicle usage of 10 years is encouraged by a refund of 50% value of the ARF if the vehicle is scrapped by the 10th year. If the vehicle owner were to retain the car after the 10th year, the vehicle loses its scrap value as well as the ARF refund eligibility when scrapped. From the perspective of cost recovery, it is more sensible to scrap the vehicle by the 10th year and purchase a new one for most motorists. In addition, a typical warranty for hybrid vehicles covers the battery for 10 years which could imply the same coverage for EVs’ batteries. For a fair comparison of the life cycle cost, we assume a lifetime of 10 years for all cars in this study. When computing the net present value of annualized cost components such as annual road tax and insurance (considered as part of the fixed maintenance cost), we assume a discount of rate of 4% which is consistent with the discount rate used in typical economic research projects in Singapore. Assumptions on insurance cost is based on estimates of average of insurance premiums for each of the car categories. As EVs are not available for sale to private buyers in Singapore at present, the capital cost of EVs is computed based on their estimated OMVs and applicable taxes and rebates as discussed in Section 2.2. The road tax is correlated to the engine capacity or equivalent engine capacity for EVs in Singapore. The formula for calculating vehicle road tax is published on Singapore’s One Motoring website (http:// www.onemotoring.com.sg). Vehicles with larger engine capacity would need to pay a higher road tax. Since majority of EVs made in Japan, Europe and China are considered as smaller and less powerful cars, the road tax of these EVs is thus much lower than those of other car types. In comparison, Tesla EVs are considered as larger and more powerful car with a larger equivalent engine capacity. As such, Tesla EV owners could potentially pay a higher road tax than many ICEVs. The insurance cost is primarily tied to the paper value of the car and are thus somewhat the same across many car categories. The capital cost (adjusted for

2.3.3. Germany Germany announced that it would not provide direct subsidies to the sales of EVs in 2010. Instead, the government would fund research in the area of electric mobility [29]. Since 2016, EVs are exempt from the country’s annual circulation tax for 10 years. In 2016, Germany introduced a direct subsidy for private EV buyers at €5000 and corporate buyers at €3000 to offset the upfront purchase price of EVs. The incentives will be gradually reduced by €500 each year until 2020. In addition, buyers of certain type of EVs are also given substantial discount and other incentives. 2.3.4. Japan In Japan, the first incentive program was introduced in 1996, modified in 1998 and ended in 2003. The subsidy for EVs is given based on (up to) 50% of the incremental cost of an EV as compared to the price of an ICEV [30]. From April 2009 to March 2010, an incentive program was established to provide two types of purchasing subsidies for EV buyers [31]. The first type of subsidy is given to those purchasing a new EV without scrapping a used car at 100,000 Japanese Yen for a standard or small car and 50,000 Japanese Yen for a kei (mini) car. The second type of subsidy is given to those purchasing a new EV and at the same time scrapping a 13-year or older vehicle at 250,000 Japanese Yen for a standard or small car and 125,000 Japanese Yen for a mini or Kei vehicle. 2.3.5. South Korea South Korea announced plans to increase the market share of EVs through battery life and storage capacity improvements and establishment of a network of charging stations in July 2016 [32]. A one-time 1109

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Table 3 Capital cost, road tax, and insurance cost in Singapore (2017 Singapore Dollars). Body Type

Capital Cost

Road Tax

Insurance Cost

Hatchbacks Sedans Large Sedans Small SUV/MPV SUV Sports Car Luxury Hatchbacks Luxury Small Sedans Luxury Sedans Luxury Large Sedans Luxury Small SUV/MPV Luxury SUV Luxury Sports Car EV Tesla EV Japanese EV European EV Chinese

83,198 82,565 105,892 93,784 107,415 131,495 97,220 95,848 123,797 180,799 144,723 183,094 243,857 336,284 102,166 108,737 104,044

4309 4605 9465 6942 10,601 11,063 6040 1497 6904 12,423 9101 13,291 16,862 13,986 3393 5296 2632

13,789 17,844 17,844 17,844 17,844 17,844 13,789 17,844 17,844 17,844 17,844 17,844 17,844 13,789 13,789 13,789 13,789

Fig. 3. Simplified representation of the typical and proposed business model (arrows indicate the direction of price payment).

3.2. The new business model

the scrap value by the 10th year), road tax, and insurance cost are summarized in Table 3. For better observation on the capital cost, the capital cost of all car types is normalized against the capital cost of Hatchback ICEV (Fig. 2). The reason for normalizing against Hatchback is because Hatchback is the most popular segment of cars in Singapore by statistics. We find that Japanese, European, and Chinese EVs, which compete with Hatchback and Sedan categories, are penalized by their higher capital cost. The normalized cost calculation shows that EVs on average are 20% to 30% (Tesla being 3 times) more expensive to purchase and register. Since the COE premium represents an important stream of tax revenue, it is inconceivable for Singapore to abandon the COE policy for reining vehicle population growth. In the absence of policy support such as cash rebate or COE exemptions, EVs are not cost competitive. The higher capital cost of EVs together with the lack of charging infrastructure and lukewarm customer interest thus act as barriers to widespread adoption of EVs.

In the traditional or the current business model in Singapore market, all costs are borne by vehicle buyers directly. The prospective EV buyers have the option to apply for a bank loan at interest rates determined by the bank. Usually and in the case of Singapore, vehicle buyers are still required to pay a predetermined percentage of the total purchase price as down payment. The balance amount can be paid through loan arrangement. Upon loan approval, the bank pays the balance price to the dealer and the buyer repays the bank through monthly installment or other arrangements as negotiated with the bank. The outcome is a heavy financial commitment for the buyer since a loan arrangement effectively increases the equivalent purchase price of vehicles. Therefore, we challenge the traditional business model by radically changing the structure of the value chain with the objective of addressing the interests of all stakeholders in the ecosystems of EVs. Introducing the concept of post-paid mobile phone purchase contract, we propose a business model in which the upfront COE payment to the government is “subsidized” by EV dealers and a “payback” is required from EV buyers. A simplified representation of the overall scheme of this proposed business model is presented in Fig. 3. The

Fig. 2. Normalized capital cost of vehicles in Singapore. 1110

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Fig. 4. Singapore Gasoline and Brent Prices (2017 USD/bbl.)

10 years based on the following reasons. The rational for selecting these three repayment periods is as follows. A typical warranty period for Japanese-made ICEVs is 3 years. The maximum duration of a long-tenor car loan is 7 years. The maximum lifetime of all car in Singapore is 10 years. For the calculation of lifetime costs of vehicles in Singapore, we propose a projection of retail gasoline and electricity prices in Singapore market. A rigorous price estimation exercise would merit a research study of its own. Therefore, our approach is more to approximate the projections based on empirical facts and reasoning so as to provide a reasonable time series prices for computing the total cost of vehicle ownership.

objecitves are to achieve upfront purchase cost reduction for the buyer and to potentially further improve the overall profitability for the dealer while ensuring tax revenue for the government. Under the proposed business model, the COE premium being part of the upfront purchase cost in the traditional business model is “absorbed” by the EV dealer. In other words, the dealer pays the government the COE premium upfront without asking the buyer to pay immediately through cash or loan arrangement. This would directly reduce the upfront cost of the buyer when purchasing an EV. However, it is still necessary for the EV dealer to recover the cost of “subsidizing” the COE premium to ensure profitability. This can be accomplished through a dealer-buyer contractual arrangement on the usage of EVs. In the traditional business model, EV owners purchase electricity directly from the electricity market when charging the vehicle. In the proposed business model, the COE is firstly paid upfront by the dealer, who then adjusts for the COE from EV buyers as a monthly repayment which covers the electricity usage cost. As such, EV owners are required to purchase electricity from the dealer at a given quantity and a given or contracted price; and then the dealer pays for the same quantity of electricity use to the market retailer or wholesaler at the market price. In effect, the EV dealer acts as a “middleman” between the EV owner and the electricity market and derives profit through a mark-up of the market electricity price. In this paper, we assume that the EV dealer specifies a fixed monthly or annual electricity consumption commitment for the owner over a desired period of payback time so as to recover the cost of the COE premium. Since COE constitutes an average of 50% of the cost of an ICEV sedan or a hatchback (the classes of vehicles in direct competition against main stream EVs), the elimination of COE premium in the capital cost formula greatly increases the cost-competitiveness of EVs. Since the COE payment to the government is guaranteed in this value chain, the proposed business model can offer assurance over tax revenues. This business model would inevitably increase the running cost of EV owners since the EV owners are ultimately paying for the COE except in a quasi-post-paid purchase arrangement. However, the reduction in capital cost could still be attractive to vehicle buyers especially first-time vehicle buyers. The challenge is then to identify an appropriate repayment period under which EV owners can enjoy the minimum mileage and/or contracted electricity prices. A most rigorous approach is to apply an optimization algorithm to find the least cost arrangement for EV owners, but such an approach is beyond the scope of the present study. Instead, three repayment periods are considered in this study, namely, 3, 7 and

3.3. Fuel price projections Gasoline is also taxed heavily in Singapore with retail price at the pump determined based on the refinery price of oil products, refinery margins, government fuel taxes, retailer margins and other cost components and government sales tax. The key parameter for determining the fuel retail price is the quoted oil product benchmark price known as the Mean of Platts Singapore (MOPS). In this case, MOPS refers to the Free-on-board (FOB) Mean of Platts Price of oil product (Gasoline 92, 95 and 98 and Diesel) cargoes loaded in Singapore. For example, Singapore Ministry of Trade Industry (MTI) conducted a study and found that for every 10 cents change in price of international crude oil prices, MOPS price changes by 7 cents with an adjustment period of less than 10 days. The MOPS is closely correlated with the crude oil price as reflected in Fig. 4 (Figure drawn based on data from [34]). Studies in Singapore have found that retail petrol prices move in line with crude oil prices. A fixed factors regression modelling analysis by the MTI [35] shows that, when crude oil prices increase, a two-week lagged crude oil price yields the highest significance in explaining pump price movements. When crude oil prices decrease, a one-week lag yields the highest significance in the price decline. The study by the MTI also finds that response of retail fuel price to rise and fall of crude oil price is symmetric. Therefore, the forecast of fuel price in Singapore can be approximated by a forecast of Brent oil price since taxes and margin costs on fuel largely remain fixed over many years. The retail price of fuel in Singapore can be estimated by substituting MOPS price as a function of Brent crude oil price, where the forecasted Brent prices are taken from the International Energy Agency crude oil price forecast (Eq. (1)). 1111

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Retail Fuel

Price = 0.7∗ ((Brent + Refinery Margin + 0.64) ∗1.6) ∗1.07 Ltr + 0.3∗ ((Brent + Refinery Margin + 0.56) ∗1.6) ∗1.07

(1)

The refinery margin is estimated from the latest three-year historical values. The factor of 1.6 cumulatively accounts for all the overhead costs associated with fuel retailing, including an 8% dealer margin (industry estimate), amortized land costs, transportation costs, other direct costs and 3% losses at pump level. The 64 cents and 56 cents are taxes per liter of petrol for 95 Octane and 92 Octane ratings respectively. The factors of 0.7 and 0.3 are the ratios of the amount of fuel retailed in the 95 and 92 Octane rating respectively [36]. The factor of 1.07 accounts for the GST which is applicable to all commercial transactions in Singapore. Fig. 6. Natural gas spot price and retail electricity price projections in Singapore.

3.4. Electricity price projections

modelling of the wholesale electricity market requires more considerations beyond the scope of this paper. As such, only the retail electricity price forecast is carried out in this paper. The forecasted natural gas spot prices and the retail electricity prices are presented in Fig. 6.

Singapore electricity market is liberalized with the wholesale market being contestable by large consumers from economic sectors such as the petroleum, commercial service, and transport sectors. The retail electricity market is in-a-way regulated for smaller and household consumers. More than 97 per cent of the electricity produced in Singapore comes from natural gas fired power plants [37], and 100 per cent of the natural gas is supplied through imports from neighboring countries [38]. The price of pipeline natural gas has been indexed to the price of fuel oil and indirectly to the price of crude oil. A plot of the average wholesale electricity price in the market based on data from [34] shows significant volatility in prices, with the average prices ranging between $70 to $150 per MWh electricity over the latest 3 year period (Fig. 5). As Singapore is moving towards a liquefied natural gas (LNG) only market in light of the expiration of the pipeline contracts with Malaysia and Indonesia, the average spot LNG price forecasts in Singapore allows us to calculate electricity price forecasts. The wholesale electricity price is a linear function of natural gas price and a margin of a given percentage. The retail electricity price is sum of the wholesale electricity price, producer margin, transportation fees, grid fees, and taxes by Singapore Energy Market Authority (EMA) plus a 7 per cent GST. Both of the wholesale and retail electricity prices can be approximated as a function of natural gas spot price in Singapore market. The natural gas price forecast is obtained through the use of a World Gas Model as described in [39]. This enables a 10-year forecast of wholesale and retail prices in Singapore market starting from 2017. However, the

4. Total cost of vehicle ownership under various business models The total cost of vehicle ownership includes capital cost, road tax, insurance cost, fuel cost and maintenance cost. The road tax, insurance cost, fuel cost, and maintenance cost are categorized as operating cost usually incurred on an annual basis. As such, total cost of vehicle ownership is calculated as the sum of the capital cost and the present value of total operating costs over the economic lifetime of the car. Assumptions on gasoline and electricity prices as explained in the preceding section are used to compute the life cycle fuel cost of vehicles in Singapore. The annual average mileage data for cars in Singapore are taken from the statistics published by Singapore Land Transport Authority [40]. For comparison, we compute the lifetime ownership cost of cars in Singapore using the traditional and the proposed business models. 4.1. Traditional business model As explained in Section 3.1, EVs are disadvantaged against ICEVs when measured by capital cost even with the maximum CEVS rebate

Fig. 5. Daily average wholesale electricity price in Singapore. 1112

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Fig. 7. Normalized life cycle cost of vehicle ownership in Singapore (Capital cost of hatchback ICEV = 1).

Fig. 8. Normalized life cycle cost of vehicle ownership in Singapore – dealer COE payback in 3 years (Capital cost of hatchback ICEV = 1).

A further observation of the results as shown in Fig. 7 shows that the total electricity cost of EVs is many orders of magnitude lower than the total fuel cost of ICEVs. This is mainly due to the higher fuel economy of EVs compared to ICEVs and the lower electricity tariff compared to gasoline prices. It is thus sensible for the proposed business model to shift part of the upfront cost towards the running costs of EVs. Since the proposed business model is aimed at significantly reducing the upfront cash commitment of the buyer, it is possible for the buyer to avoid taking up a loan.

based on our calculations. A loan arrangement could help ease the upfront cash commitment of the buyer, but it does not change the overall cost-competitiveness or the cost-disadvantages of EVs when measured by the total purchase price. However, the landscape of cost competitiveness changes when measured by the total cost of vehicle ownership over the assumed lifetime of 10 years. Under the assumed gasoline and retail electricity price projections, EVs except Tesla made EV models are generally on par with hatchback ICEV and are competitive against all other body types of ICEV. This is reflected by the normalized cost calculation as shown in Fig. 7. In this paper, all cost components are normalized against the capital cost of hatchback ICEV. 1113

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Fig. 9. Normalized life cycle cost of vehicle ownership in Singapore – all results (Capital cost of Hatchback ICEV = 1). (a) Traditional business model; (b) COE payback in 3 years; (c) COE payback in 7 years; and (d) COE payback in 10 years.

that the operating cost excludes fuel or electricity cost throughout this paper. The normalized values of main cost components in all cases (or repayment periods) are summarized in Fig. 9. The reduction in capital cost and the increase in electricity cost in the proposed business model are obvious from Fig. 9, but the differences in the total cost of vehicle ownership across the four plots is less visible. The values of the life cycle vehicle ownership costs under the traditional business model, and COE repayment over 3 years, 7 years and 10 years are further presented in Table 4. These values suggest that the proposed business model has a negligible influence on the total cost of EV ownership regardless the payback period. Since there is no effect on the COE premium payment to the government, this particular tax revenue of the government is not compromised. Dealers are expected to have the COE paid back with an equivalent interest of 5% on the capital and owners are expected to pay higher monthly amount during the repayment period for charging when compared to that in the traditional business model. The main reason for the negligible influence of the COE repayment scheme on the total cost of EV ownership in the proposed business model is the lower operating and fuel costs of EVs. As an example, the monthly repayment for EV for a 7-year payback period (typical tenor of a car loan as of November 2018) for a popular EV is $718 to $753 per

4.2. Proposed business model As a reiteration from Section 3, the COE component of the capital cost is absorbed by the dealer, but the buyer is assumed to engage in a repayment scheme over 3, 7 or 10 years to payback the absorbed COE. Using a 3-year payback period as an example of illustration (Fig. 8), absorbing the COE component of the capital cost by the dealer has an immediate effect in reducing the upfront purchase cost of EVs. Comparing the results shown in Fig. 7 and Fig. 8, the capital cost of EVs can be reduced to about 70% of that of comparable ICEVs under the proposed business model. In return, the total electricity cost is increased by about 10 times from that in the traditional business model for EVs. This is due to the mark-up in the electricity price by the EV dealer so as to recover the cost of absorbing the COE premium for the vehicle buyer in the proposed business model. In effect, the total electricity cost of EVs becomes more than doubling of the total fuel cost of comparable ICEVs under a 3-year payback period. For Tesla model, the total electricity cost is expected to become nearly 70% higher than a comparable vehicle in the luxury sports car and luxury SUV categories. For ease of observation, the road tax, insurance costs and car maintenance costs are combined into operating cost. It is noteworthy

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The lower operating cost and comparatively higher efficiency of EVs (compared to ICEVs) can absorb the impact of COE repayment scheme from the buyer’s perspective. The burden of COE repayment through a higher electricity price lessens even further if the repayment is extended to 10 year. As reflected in Table 5, the monthly electricity cost required to be committed by owners is lower for longer contract periods. In addition, it is noteworthy that EV owners are only required to commit to the total monthly electricity cost during the prescribed payback period. Upon expiry of the payback period, EV owners can and should be allowed the option to purchase electricity from the market.

Table 4 Normalized lifetime ownership cost of various cars with No subsidy, 3-, 7- and 10-year COE payback scheme. Body types

No Subsidy

3-Year COE Repayment

7-Year COE repayment

10-Year COE Repayment

Hatchback Sedan Large Sedan Small SUV/MPV SUV Sports Car Luxury Hatchback Luxury Small Sedan Luxury Sedan Luxury Large Sedan Luxury Small SUV/MPV Luxury SUV Luxury Sports Car EV Tesla EV Japanese EV European EV Chinese

1.57 1.75 2.08 1.90 2.18 2.48 1.81

1.57 1.75 2.08 1.90 2.18 2.48 1.81

1.57 1.75 2.08 1.90 2.18 2.48 1.81

1.57 1.75 2.08 1.90 2.18 2.48 1.81

1.81

1.81

1.81

1.81

2.26 3.01

2.26 3.01

2.26 3.01

2.26 3.01

2.54

2.54

2.54

2.54

3.12 3.90 4.47 1.50 1.62 1.52

3.12 3.90 4.48 1.51 1.63 1.53

3.12 3.90 4.49 1.52 1.64 1.54

3.12 3.90 4.50 1.53 1.65 1.55

5. Discussions and policy implications The adoption of EVs can contribute to reducing pollutions and greenhouse gas emissions since EVs are more energy efficient than ICEVs when measured by fuel economy (such as km/MJ) [1]. However, the cleanness of EVs would ultimately depend on that of a city’s power source. If the city depends primarily on fossil fuels for electricity production, adding more EVs could simply translate to shifting carbon emissions and pollutions from the transport sector to the power sector albeit an overall reduction in the system-level carbon emissions and pollutions [41]. In addition, a wide adoption of EVs would also add to traffic congestion in addition to potentially sharply rising COE premium when the vehicle population growth rate is further mediated by the government. A large EV population could also bring technical and hence cost implications to the power grid [42]. As reflected in a study on Singapore’s electricity sector, an aggressive deployment of EVs could bring significant impact to power sector planning [43]. The present electricity market infrastructure can already allow the proposed business model to be materialized. As schematized in Fig. 10 (modified from the original image published at [44]), qualified EV dealers can be registered as retailers selling electricity to the buyers of their EV fleet. There are no changes to the existing electricity market infrastructure necessary. However, along the lines of vehicle-to-grid (V2G), EVs could be utilized as distributed energy storage systems that can provide ancillary services, peak load shaving, load shifting, load leveling and help integrate intermittent renewable energy sources in the context of a smart grid [45]. Although the establishment of a smart grid could benefit power sector planning [46], the V2G technology is yet to be further developed and commercialized [47]. Assuming the V2G technology can be commercially deployed, there still are the issues of pricing for discharge back to the grid, public acceptance on automated management of vehicle charging/discharging, cooperation

Table 5 Monthly payment for EVs inclusive of charging costs (Unit: 2017 Singapore Dollars).

EV EV EV EV

Tesla Japanese European Chinese

3-year COE Payback

7-year COE Payback

10-year COE Payback

1597 1522 1597 1522

753 718 753 718

565 539 565 539

month on electricity usage. The fuel cost of EVs is about 20% of a comparable ICEV in the traditional business model. Although the electricity cost of EV is about doubling of the fuel cost of ICEV in the proposed business model, this additional cost due to the amortized COE added to the charging cost has a weaker influence on the total cost of vehicle ownership when compared to the reduction in the upfront capital cost.

Fig. 10. Conceptual implementation of the business model under the current electricity market infrastructure. 1115

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formulated value chain can provide an alternative avenue for promoting the adoption of EVs. In this study, a business model is conceived through a dealer-buyer cost-sharing scheme in which the dealer “subsidize” a part of the upfront purchase price of EVs while the buyer engage the dealer as a “middle-man” when purchasing electricity for charging needs. EV buyers are also required to commit a minimum electricity usage quantity over a fixed period of time so as to allow dealers to “recover” their “subsidy”. The overall concept of the proposed business model is similar to a post-paid mobile phone purchase contract in which the subscriber buys a mobile phone at a heavily discounted price by committing to a fixed monthly minimum price plan including phone calls and mobile data. The proposed business model can demonstrate assurance over tax revenue streams to the government and profitability of EV dealers. At the same time, it can significantly reduce the barrier to EV adoption, which is usually the high upfront purchase cost. The commercial viability of the proposed business model is demonstrated using Singapore’s market situation as a worse-case scenario or the bottom-line for EV business. The total purchase price of a car is literally the highest in Singapore compared to the rest of the world and government taxes account for a major part of the purchase price. There is no incentive policy instrument supporting the adoption of EVs although there is CEVS to encourage the adoption of low carbon vehicles in general. Findings from our case study further demonstrate that there is indeed a business case for driving the adoption of EVs based entirely on the effort from the private sector. However, testing the business model in the real market situation is beyond the scope of this paper but we recommend such effort as future research. We contemplate that the same business model can be widely applied to all cities around the world to encourage the adoption of EVs without affecting their existing transport policy infrastructure. However, successful implementation of the proposed business model would still depend on cooperation between EV dealer and buyer, and policy and regulatory framework related to infrastructure development such as purchase/sales of electricity and charging arrangements.

among generation companies, power grid operators, and individual consumers. There are additional barriers to the success of the proposed business model. The successful implementation of such a model requires cooperation among EV dealers, electricity retailers, and infrastructure providers. In the context of Singapore, special government permits, especially those from the EMA, Building and Construction Authority, and/or Housing Development Board could be required for private and/ or public charging points to be installed in existing and new car parks in the context of Singapore. However, policy and regulatory frameworks on the installation of charging points in public car parks are not yet established in the country. All costs of parking lot allocation and installation of charging points will be borne by the private party which would ultimately be the EV buyers. In addition, EV dealers have to act as electricity retailers on the pricing, commitment quantity, and repayment period to ensure profitability at a reasonable cost to the buyers. The final step is to ensure only EVs are always able to park at lots with charging points. In the absence of policy support, added profitability would be required to ensure cooperation among all stakeholders. The added profitability could potentially increase in the total cost of EV ownership and influence the contracting terms between the EV dealer and the buyer. It is therefore important for government to regulate both the EV sales and usage markets so as to ensure a healthy growth of EV businesses. Revisiting the case study results, we contemplate that it is possible to further increase the COE premium to accommodate the increased effort in government regulation to rein vehicle growth without a significant impact to the total cost of EV ownership. We further contemplate that it is also possible for EV dealers to further absorb the upfront purchase cost without a significant impact to their overall profitability over the life cycle of EVs. However, battery technology, easy access to charging stations/points, driving experience, and other non-cost factors would continue to influence public acceptance of EVs. Replacing the current fleet of ICEVs with EVs rather than simply adding more EVs to the road would probably be a sensible approach given a balanced consideration over the issues discussed above. Moving forward, there could be further policy questions demanding critical evaluations on the cost-benefit of EVs and their positioning in the private car market in the absence of supportive policy instruments. These may include transport modal shift from private to public transport demand, full liberalization of the electricity market, tighter control over vehicle population growth, tax over fuel and electricity, and other macroeconomic considerations.

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6. Conclusions EVs are disadvantaged against ICEVs when measured by the upfront purchase cost or the capital cost, especially when levy-based congestion control measures such as the COE, is added to the purchase price. The dealer-buyer cost-sharing business model as proposed in this study can provide an avenue to defray the high upfront cost. The cost-sharing scheme in the proposed business model is beneficial to both the public and private sectors as it does not affect government revenues from all existing taxes and congestion measures while lowering the barriers of EV ownership. Although the cost-sharing scheme would ultimately increase the total cost of EV ownership when computed over the life cycle of the EV, the increase in the life cycle cost of EV is almost negligible. The life cycle cost of EVs would still be competitive against that of ICEVs of the same body type. The electricity price, quantity, and repayment period commitment by consumers examined in this study is only an example and is not exhaustive. There could be theoretically optimum points at which the costs to the buyer and/or the dealer are minimum. The business model proposed in this study seeks to break the conventional thinking that a wide adoption of EVs has to depend on government incentives. In the absence of policy support, a meticulously 1116

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