With the new Labour government taking office at No.10 this week, the automotive sector — an essential element of the UK’s net zero commitments — is hoping to receive increased attention and support.

In January, the zero-emission vehicle (ZEV) mandate, one of the most ambitious regulatory frameworks for the switch to electric vehicles (EVs), came into effect. The ZEV mandate states that 80% of new cars and 70% of new vans sold in Great Britain must produce zero emissions by 2030, increasing to 100% by 2035.

However, since January, the motor industry’s ability to meet these targets has been questioned. In February, the House of Lords Environment and Climate Committee called on the government to accelerate its efforts. At the same time, car manufacturers voiced frustration at the omission of purchase incentives for EVs in the latest Spring Budget, viewing it as a wasted opportunity.

Josh Skelding

With no further government incentives for consumers in the pipeline, how can the motor finance industry innovate to drive demand, particularly among consumers, if government EV sales targets are to be achieved?

State of the market: EVs

High EV prices are proving to be a sore point for consumers. With new EVs still averaging a 33% price premium over ICE vehicles, it’s unsurprising that widespread EV adoption is still a challenge.

This price premium is also a real concern for manufacturers. With the zero-emission vehicle mandate, there’s growing pressure on manufacturers to ensure that electric vehicles make up at least 22% of their sales this year. Any shortfalls in electric vehicle sales are penalised with a fine of £15,000 per non-compliant vehicle sold.

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Despite the initial cost barrier for new EVs relative to ICE vehicles, used EVs are becoming increasingly popular. Q1 sales for used EVs were up by more than two-thirds, and according to Autotrader, prices have dropped by 16.8% year-on-year; in contrast, used petrol and diesel cars only saw a 5.7% decrease year-on-year.

Yet, even with electric vehicles becoming more affordable in the used market, there’s still more work to be done to reach sales targets. Improving consumer confidence will be crucial in achieving the 22% sales target this year, and financial innovation and technology can contribute in two key ways.

Charging infrastructure

The commercial uptake of electric vehicles is hindered by two factors: the upfront cost of EVs and the infrastructure required to support them.

First, let’s look at infrastructure. Many potential buyers grapple with “range anxiety,” fearing they won’t be able to rely on the current infrastructure in place if they run out of charge. There’s merit to this idea, with the government’s shortfall in meeting motorway charge point targets and 25-40% of households lacking off-street parking. Thus, a cycle ensues: the lack of charging infrastructure stifles EV adoption, while the limited uptake of EVs hinders infrastructure development.

Forward-thinking financial solutions like Utilisation Linked Finance (ULF) could be a game-changer. ULF offers a practical financing solution by adjusting payments for charge point installations based on their real-world usage. ULF can encourage more private investment by reducing installers’ risks and incentivising expansion into areas with uncertain demand. This can then optimise resource allocation by aligning investment with usage patterns, ensuring the efficient deployment of charge points.

Loan origination solutions

While new car sales increased last year, depressed consumer confidence due to high interest rates and economic inflation meant that the overall market was 17.7% below pre-pandemic levels at the end of 2023.

However, leasing is proving to be an increasingly popular option. According to Leasing.com, battery, plugin and hybrid electric vehicles combined accounted for more than half (53%) of business lease enquiries in Q3 2022.

One of the main advantages of leasing an EV is the lower upfront costs compared to purchasing a new vehicle outright. This translates to reduced monthly payments and the flexibility to opt for a smaller initial payment, therefore improving accessibility. The greater flexibility offered with lending options also allows the policyholder to align the policy with their requirements and preferences.

However, EV financing has inherent complexities compared to ICE leasing, which can be problematic for lenders. One such issue is the lack of long-term data on depreciation patterns. As financing becomes increasingly popular, it’s key that lenders have the right technological infrastructure in place to deal with market changes quickly.

Many lenders still depend on legacy technology, but by investing in advanced loan origination technology, lenders can gain insights into EV depreciation trends by using predictive modelling and machine learning algorithms to better understand the EV market. This can result in enhanced decision-making processes and risk management strategies. Configurable loan origination technology also facilitates faster and more accurate processing of loan applications by replacing manual tasks, allowing the customer to receive a faster decision from the lender.

As the market shifts from early adopters of EVs to the mass market, laying the necessary foundations for success, whether that’s through infrastructure developments or more financially accessible options, will be key. If the zero-emission vehicle mandate is to be achieved, cooperation with the government and all players in the sector is needed to increase consumer confidence in the viability of EVs.

Josh Skelding is the Commercial Director at Fignum

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