Policy Group Quarterly

Think Infrastructure. Think IDFC.

No. 9 / September 2010

Electric Vehicles: Driving Towards A Greener Future

Greenhouse Gas (GHG) emissions from transport in India are expected to double from the current levels of 7.5% of total emissions by 2025. Similar concerns globally are forcing automobile companies and governments to think of ways of increasing vehicular efficiency, reducing emissions of internal combustion engine (ICE) and switching to cleaner fuels. But it is Electric Vehicles (EVs) that offer almost pollution-free transportation that are garnering most attention. Not surprisingly, governments across the world have initiated dedicated programmes for EVs. Every major global & Indian car manufacturer is releasing or planning an EV. So, how can EVs be promoted in India? This Quarterly suggests the ingredients of a roadmap.

Initiative in Focus Electric Vehicles Infrastructure Development - Turning Points Infrastructure Bonds Policy Group News & Events

EVs and their Relevance EVs use batteries instead of petrol or diesel to power the engine. Batteries are charged from the grid (or non-grid sources such as photovoltaic panels) and by brake energy recuperation (braking generates energy that is sent to the batteries, instead of being wasted in heat). EVs are of three types: battery electric (also the general reference to EVs), hybrid electric (HEV), and fuel cell electric (FCE). HEVs use two sources of power viz. the ICE as well as electric motor. FCE vehicles combine hydrogen and oxygen to produce electricity but they are in prototype and demonstration phases. The advantages of EVs are well-established. They reduce GHG emissions and dependence on expensive oil imports, and have lower fuel costs and maintenance costs as they have no oil filters, air filters, spark plugs, radiator, etc. Additionally, they are energy-efficient (see Table 1). The Indian Experience with EVs Electric cars were first commercially launched in India in 2001 by REVA Electric Car Company Pvt. Ltd., Bangalore (REVA). The REVA model available in India is powered by lead-acid batteries (LAB), costs upwards of Rs. 4 lakh, has a top speed of 80
Table 1: Advantages of EVs using REVA as an Example 1000cc petrol REVA1 car2 CO2 Vehicular 0 126.373 emissions (gm/km) Well to Tank CO2 67.55 57.36 emissions (gm/km)4 Energy efficiency 405 1726 (kilo joules/km) Fuel costs (Rs./km) 0.457 0.6 x 2.3-3.58

km per hour and a declared driving range of 80 km per charge which takes about 9 units of electricity. But a full charge takes about 8 hours. Quick computations indicate that REVA seems to have an advantage over ICE in terms of lifetime ownership costs (see Figure 1). But there are indications that the cost of producing the car may be much higher than its domestic retail price, which would tilt the economic viability towards ICE. Some states offer subsidies on REVA. Delhi gives a 15% rebate on the retail price, VAT exemption of 12.5%, and exemption from road tax and registration expenses. Few others give reduced VAT rates of 4%. But the car remains a non-starter, with domestic sales of only about 1000 cars till date. There are several reasons why it hasnt taken off. The car features are very basic and it is even smaller than a Nano; essentially a 2-seater. Therefore, the high upfront cost of the car makes it unattractive compared to the small sized ICE cars which not only offer better functionality (speed, power and range) but are also available at comparable or lower prices. The absence of retail outlets and public charging infrastructure are other major issues.
Figure 1: Lifetime Ownership Costs of a REVA Compared with a Small Petrol Car (Rs./km)

10 8 6 4 2

For Queries, Please Contact : Ritu Anand

(ritu.anand@idfc.com)

Maintenance costs

0 ICE Petrol Vehicle price REVA Fuel & Maintenance Costs Battery Cost

Sambit Basu
(sambit.basu@idfc.com)

Piyush Tiwari
(piyush.tiwari@idfc.com)

Manisha Gulati
(manisha.gulati@idfc.com)

Kunal Katara
(kunal.katara@idfc.com)

Lavi DCosta
(lavi.dcosta@idfc.com)

Bharati Sawant
(bharati.sawant@idfc.com)

Source: IDFC Analysis Notes: 1. Features discussed in the next section. 2. Maruti 800, Nano, Zen, Alto, Wagon R, Spark etc. 3. Automotive Research Association of India. 4. From transportation, storage, processing, & distribution of fuel to the vehicle. 5. Using Indias power generation mix as of March 2010 & CEAs emission factors for power generation fuels. 6. MIT Electric Vehicle Team, April 2008 7. Electricity @ Rs. 4/unit. 8. Using declared fuel economy values of 16-24 km/l for cars in this category.

Source: IDFC Analysis Notes: General: 10-year useful life of vehicles; vehicle financing (excluding battery pack) for 5 years @ 15%, taxes/duties & insurance @ 12% of vehicle cost, inflation @ 6% p.a., daily driving distance of 40 km, discount rate for NPV: 10% . ICE Petrol: Cost of car @ Rs. 2.5 Lakh, Petrol @ Rs. 56, mileage @ 16 km/l. REVA: Cost without battery pack @ Rs. 3 Lakh, LAB pack @ Rs. 80,000, range of 80 km/charge, 9 units of electricity for full charge, battery life of 2.5 years.

Policy Group Quarterly September 2010

The main reason for the high comparative cost of the car is the battery. The current REVA model uses 8 batteries of 48volts and 200 amp-hour which are priced at Rs. 80,000 and have an expected average lifetime of 2-3 years. Matching the ICE functionality would mean more batteries and, therefore higher costs. Further, replacing batteries every 3 years makes the car expensive and unappealing as the market value of the car depreciates and there is no re-sale car market. Nevertheless, electric two wheelers (E2W) have seen some success triggered by a proliferation of regional manufacturers importing E2W kits from China and Taiwan. Their ownership is easy since the majority of them fall outside the purview of the Central Motor Vehicle Rules. With a motor of below 250W and a top speed of 25 km/h, they are exempt from registration and road tax, and are license free. LAB priced at Rs. 5000-7000 makes the overall price of Rs. 15,000 - Rs. 30,000 affordable, and the driving range of up to 40-45 km makes them useful for daily mobility. A full charge requires as low as 1 one unit of electricity, making the running cost negligible (10 paise/km if electricity is Rs. 4/unit). Battery replacement does not burn a hole in the pocket. High powered indigenous E2W with motors capable of sourcing over 500W are also available. They cost upwards of Rs. 30,000, have speeds between 40-60 km/h and driving range of 50-80 kms. However, cheaper substitutes have restricted their market, besides denting the image of EVs as these substitutes encounter problems with electrical kits, spare parts, and servicing. The Main Challenges for EVs Battery technology: The main bottleneck to the large scale uptake of EVs is battery systems. Currently employed LAB limit the driving range and acceleration, are heavy and take up considerable vehicle space, take long to recharge (6-9 hours), have low durability and limited life spans. Thus, car owners often fear being stranded in an EV due to inadequate battery capacity. Alternatives such as Lithium-Ion are still very expensive (see Table 2).
Table 2: Battery Technology Comparison Battery technology Lead acid Nickel Cost (USD/kwh) Energy Density (Wh/kg) Charge efficiency (%) Charge cycles 200-300 30-40 70-90 500-1000 600-800 60-80 60-80 500-2000

manufacturers and charging infrastructure providers can cater to particular plug designs/voltage rating specifications. A Possible Strategy for EVs in India Given the many merits of EVs, EVs need to be encouraged in India. The question is how? A simple mapping of the current features of an EV with urban mobility - characterized by slow vehicular speeds and short daily driving distances - indicates that EVs are suited for intra-city vehicles. Therefore, they can be gradually mainstreamed in this space. But till batteries leapfrog in terms of technology, only those intra-city vehicles can be considered for EVs where features dont take priority and the existing LAB technology can be used. Intra-city small commercial vehicles (essentially people and goods carriers) are therefore, potential candidates for EVs. But back-of-the-envelope estimates of the economics of these vehicles, which run mostly on diesel, indicate that these carriers are more competitive than their electric counterparts in terms of lifetime ownership costs. However, if government subsidy on diesel is taken into account, electric commercial carriers become almost as competitive as the diesel ones (see Figure 2).
Figure 2: Lifetime Ownership Costs of Intra-City Commercial Carriers Illustrated using Three Wheelers (Rs./km)

0 Subsidized Diesel Vehicle price Unsubsidized Diesel Fuel & Maintenance Costs Electric Battery Cost

Lithium Ion 650-1200 60-180 90+ 2000+

Source: IEA, Deutsche Bank, Tata Motors

Source: IDFC Analysis Notes: General: 10-year useful life for commercial carrier; vehicle financing for 2 years @ 15%, EV battery pack not financed, inflation @ 6% p.a., daily driving distance of 100 km, discount rate for NPV: 10%. Diesel three wheeler: Cost @ Rs. 1.25 Lakh, Diesel @ Rs. 42 with subsidy & Rs. 46 without subsidy, mileage @ 34 km/l. Electric three wheeler: Cost without battery pack @ Rs. 1.5 Lakh, LAB pack of 6 kWh @ USD 200/kwh, range of 90 km/charge, 9 units of electricity for full charge, battery life of 750 cycles, battery degradation of 20% over life.

Charging infrastructure: EVs necessitate recharging infrastructure akin to petrol pumps which is uneconomical unless demand reaches a critical mass. EVs could be charged at home overnight. But given that a large number of vehicles are parked kerbside, this does not appear practical. Therefore, recharging points need to be provided in petrol pumps and public spaces such as parking lots, on-street parking spaces and malls. The cost of installing a regular charge point (with a 15 amp socket) is negligible. However, given that the recharge time with these points is very high, fast charging stations would be required. REVA, for example, has developed a fast charging technology that gives a 40 km range in just 15 minutes and 80% charge in 45 minutes. But fast charging stations would be more expensive and may therefore, not be justified in the absence of adequate car volumes. A related issue here is the absence of global or national standards for EV charging infrastructure. EVs dont have the same or standard plugs to enable compatibility of the charging infrastructure with all variants and makes. Technical standards are important so that EV Policy Group Quarterly September 2010 2

A possible solution would be to subsidize EVs. Cash subsidies are already available for them (see Box 1) but they are restricted to vehicles above a certain capacity threshold and can be availed only by organized entities. 3-4 seater three wheelers (3W) and goods delivery tempos cannot avail these subsidies because of their low carrying capacity or nature and because they are owned by individuals mostly in the unorganized sector rather than entities. Even if they could avail subsidies, EVs would remain an unattractive purchase as the high cost of batteries and their replacement would be unaffordable given the economic profile of the owners of these vehicles. Figure 3 illustrates this through the example of 3W. Therefore, there is a need to find innovative ways to separate the cost of batteries from that of the vehicle to bring down the upfront cost. At the same time, the problem of charging infrastructure needs to be overcome.

Box 1: Existing Central Government Support for EVs in India

Subsidies to Buyers of EVs Buses/ Mini Buses* 10 seater or more, at least Features 70 km range, top speed of 40 km/hour Subsidy per 33% of cost or vehicle Rs.3.50 lakh

the batteries. Instead he would take batteries on a pay-per-use basis from battery or vehicle manufacturers or a private business. Batteries could be made available at petrol pumps, vehicle dealerships, and dedicated battery swapping and charging stations where the EV owner would swap or exchange depleted batteries for fully charged ones. This process is as quick as refueling at petrol pumps. The payment for such a swap or the fuel cost would include a part of the battery cost, the cost of recharging, and some portion of the cost of creating the swapping and charging infrastructure (see Figure 3). The swapping and charging stations would also offer the opportunity of parking and charging of EVs. This model is being tried internationally in Israel and Japan. However, this model necessitates some sort of standardization for batteries on aspects like dimensions and charging. The issues of old vs new batteries at the time of exchange, availability of trained manpower for changing change batteries and the economic viability of charging stations will also have to be sorted out. It is difficult to say which model can ultimately be effective. Battery features and costs, fuel prices, financing terms would determine the outcome. Detailed analysis involving different types of commercial carriers would be necessary. But the analysis does indicate that innovative approaches can be devised for the successful use of EVs in the near future. Of course, ground realities such as the vehicle ownership regimes for commercial carriers where the owner of the vehicle (who is concerned about upfront costs or loan repayment) is often not the driver (who rents the vehicle and is concerned about running costs and takehome after rent payment) would have to be addressed to ensure that the incentives to shift to EVs are not lost. Ingredients of a Roadmap for Implementing EV Strategy The transition to EVs will require government support. The following roadmap may therefore be considered: Dedicated fund to provide subsidy support to commercial EVs: The resources could come from part elimination of diesel subsidies, the National Clean Energy Fund (with appropriate

Three Wheelers* 8 seater or more, at least 90 km range, top speed of 45 km/hour 33% of cost or Rs. 80,000

Cars** 4 seater, at least 90 km range, top speed of 50 km/hour 33% of cost or Rs. 75,000

* to government organizations/undertakings, autonomous institutions, public/private limited companies, voluntary institutions registered under the Societies Registration Act, professional associations of repute registered under the Societies Registration Act. **to government organizations, public sector organizations, educational institutions, hospitals, and tourism and archaeological sites.

Grants to Research Institutions, National Laboratories & Industry 50% of costs for R&D and demonstration activities (but Approved Outlay for 2009-10 was only Rs.2 crore). Preferential Tax Treatment to industry Concessional Excise Duty @ 4% on all electrically operated vehicles (cars, 2 and 3 wheelers) as well as on goods used in the manufacture of such vehicles (Battery Pack Battery Charger AC or DC Motor AC or DC Motor Controller) till March 31, 2013.

Two alternatives can be considered viz. battery leasing and charge leasing. In case of battery leasing, the battery ownership rests with the vehicle owner but it is leased from EV Original Equipment Manufacturers (OEMs), battery manufacturers or financial services companies. This would reduce the upfront cost, but add monthly/periodic lease payments for the battery, thereby making it more affordable at the time of purchase (see Figure 3). Further, the lower fuel costs of the electric carrier would imply savings to the owner even after loan repayment. Therefore, battery replacement also becomes affordable. Though the upfront cost of batteries is reduced, this model does not address the problem of long recharge time of batteries. The second alternative of charge leasing therefore assumes importance. In this alternative, the vehicle owner would not own

Figure 3: Options to Reduce Battery Costs to Improve the Competitiveness of Electric Commercial Carriers a Feasibility Analysis using Three Wheelers
250000

250000 200000 150000

Rs.

200000

150000

Rs.

100000

100000 50000 0
Petrol Electric Electric - battery leasing model Electric - charge leasing model

50000

Diesel Upfront cost Upfront battery costs

Electric

Electric - battery leasing model

Electric - charge leasing model

Upfront cost Upfront battery costs

Annual maintenance costs Annual EMI payment

Annual fuel costs

Annual maintenance costs Annual EMI payment

Annual fuel costs

Source: IDFC Analysis Notes: Given a fuel to wheel efficiency of ICE of 15% and the energy content of petrol at 32 MJ/l, an electric 3W would need a battery of 5.6 kwh to deliver the same quantum of power as petrol 3W with a mileage of 34 km/l. Under battery leasing, if LABs cost USD 200/kwh, have a life span of 750 charge cycles and are financed @ 15% for 1.5 years (i.e. the battery life), the EMI would be Rs. 3,215 amounting to Rs. 38,584 a year. With petrol priced at Rs. 56/l and electricity at Rs. 4/kwh, the annual savings from an electric 3W with a driving range of 90 km and requiring 9 units of electricity for full charge would work out to Rs. 45,518; implying some savings after EMI payments during the remaining financing period. Under charge leasing, the electric 3W would have to pay Rs. 106 per battery swap (Rs. 69 for the battery pack, Rs. 36 for charging batteries, and a 1% markup to recover infrastructure costs). To replace a diesel 3W of similar mileage, the electric 3W would need a LAB pack of 6.3 kwh. This is because diesel has higher energy content (36MJ/l). With diesel priced at Rs. 42/l, the savings in running cost from an electric 3W would not be enough to pay for the EMI under the battery leasing model. The costs of charge leasing would also increase to Rs.114 due to increase in battery pack capacity.

Policy Group Quarterly September 2010

sunset clauses) and the CDM Programme of Activity akin to the Bachat Lamp Yojana. Regulatory measures: such as (i) tighter automotive emission norms and their enforcement; (ii) zoning codes involving no petrol or diesel zones in congested areas of cities, areas of high tourist and pilgrimage interests, and industrial townships; (iii) integrating EVs as feeder route transport services for mass transit systems (iv) phased replacement of old commercial carriers with electric versions; (v) EV quota in government vehicle and bus fleets. National standards: for charging equipment and performance/quality metrics for EV kits for E2W and EV conversion kits. Fast charging infrastructure: through the dedicated EV fund and public private partnerships with OEMs.

R&D: through a well-defined R&D programme. India lags in the manufacture of batteries, motors and motor controllers. Battery Management Systems (BMS) and Information and Communication Technology (ICTs) for energy monitoring for low battery charge; energy planning for planning routes as per vehicle range; and service support such as directions to the nearest charging/swap facility are also undeveloped. There are limited reliable LAB manufacturers for EVs and no lithium-ion battery manufacturer. The government may not be able to invest in such R&D on its own. But it can facilitate private sector R&D by providing the appropriate policy and regulatory framework so that demand for EVs can be realised. Private sector would then also be able to establish and grow battery manufacturing capacity, the most important part of the supply chain. Finally, to maintain the environmental edge of EVs, the country should increase renewable energy in the grid and off-grid.

Infrastructure Development Turning Points

Infrastructure Bonds With an aim to enable infrastructure financiers to raise long-term funds at a reasonable rate from individual investors, the GoI has introduced tax-free infrastructure bonds. Investment into these would provide an additional Rs 20,000 deduction to the assessee over and above the current limit of Rs 1 lakh under section 80C of The Income Tax Act. In July, 2010 the Ministry of Finance issued guidelines on issuances of such bonds. Entities that could issue them include IFCI, LIC, IDFC or a non-banking finance company categorized as an infrastructure finance company. The bonds should have a lock-in period of 5 years and a minimum tenure of 10 years and the bond yield should not exceed that on government securities of corresponding residual maturity. The quantum of funds that could be raised is up to 25% of the incremental infrastructure investments made by the issuer in FY 2009-10. IDFC estimates that a maximum Rs 12,400 crore could be raised by 5 such companies in FY2010-11. This would imply that a staggering 62 lakh investors would need to invest in them (assuming Rs 20,000 contributed by each investor). If this scheme is successful, the potential appetite from investors could be about Rs 50,000 crore (based on 2.5 crore assessees falling in the 20% and above tax bracket(s) [as per the recently introduced tax brackets] in FY2008-09).
Table 1: IRR of Infra Bonds Based on IFCI Bond details, Coupon Rate Needed to Match its Returns for Regular and Tax-free Interest Bonds Bond Interest Rate to Match IRR Assessee Tax Infra-Bond bracket IRR Taxable Bonds Tax-free (interest) Bonds 10% 20% 30% 11.2% 12.0% 12.8% 8.9% 10.2% 11.8% 8.2% 8.6% 9.1%

Source: IFCI Infra Bonds issue documents, IDFC analysis. Note: Interest is assumed cumulative and tenure of 10 years.

This is a very attractive instrument for the issuers as well as the investors. The post-tax IRR to individual investors in the 30% tax bracket is 12.8% (see Table 1). This is based on the first issue of such a bond by IFCI (which carries a coupon rate of 7.85% and its issue size is Rs 50 crore with a green-shoe option). For an issuer to match such returns on taxable bonds, the interest rate would need to be as high as 11.8% and in the case of tax-free (interest) bonds, about 9.1% (see Table 1).

Policy Group News & Events

We launched the Sector Update Series, the first one was Roads - Leading Indicators Show Ramp-up in Activity. rd We were on the panel at the session titled Leveraging Investment at the 3 Annual Conference on Solar Power in India: New Opportunities and Challenges; Projects and Technologies organized by Power Line during June 29-30 in Delhi. We were invited as discussants at a Roundtable on Leveraging Public & Private Finance in the Energy Efficiency Sector organized by the Climate Group & ICICI Bank on August 13 in Mumbai. Our Group Head attended the Managing Committee of the CUTS Institute of Regulation and Competition on August 30 in Delhi. An article written by our Group Head titled Land Pooling and Reconstitution appeared in Economic Times on July 19. An article co-authored by one of our team members titled Renewable Energy Requires Further Policy Impetus appeared in the Economic Times on July 22. We presented a paper titled Smoothing Consumption Fluctuations through Household Decisions on Home Improvement Expenditure in Japan at a Real Estate conference organized by the Universities of Reading, Cambridge, Ulster and Aberdeen and The Royal Institution of Chartered Surveyors during August 30-September 1 in Skye, Scotland. Our India Infrastructure Report 2010 - Infrastructure Development in a Low Carbon Economy: Road Ahead for India done along with the Indian Institute of Management, Ahmedabad and Indian Institute of Technology, Kanpur is soon going to be released. For further details contact: Sambit Basu (sambit.basu@idfc.com) IDFC Ltd., Naman Chambers, C-32, G-Block, BKC, Bandra (East), Mumbai 400 051, India. Tel: +91 22 4222 2000 Fax: +91 22 2654 0347 Website: http://www.idfc.com
Infrastructure Development Finance Company Limited (IDFC). All rights reserved. No part of this document may be reproduced or transmitted in any form without the written consent of IDFC or as provided by law.

Policy Group Quarterly September 2010