With a background in computational biology, Rueben Scriven joined Interact Analysis two years ago and leads the warehouse automation and on-highway commercial vehicle research areas. Rueben has spoken at some of the leading industry events and moderated several panel discussions on the topic of commercial vehicle electrification. He’s also appeared on CNBC to provide insight on the global electric bus market.
In Interact Analysis’ latest insight, we discussed what the impact of the Energy Saving and New Energy Vehicle Technology Roadmap (version 2) will be on the global automotive industry. This insight focuses specifically on how the updated roadmap could impact the medium- and heavy-duty commercial vehicle market.
While some information has been released, the exact nature and structure of the policy has yet to be announced. What is known, however, is that the policy will shift away from a purchase subsidy to what the government describes as a ‘user-orientated encouragement policy’.
Whilst slightly ambiguous, it is assumed this refers to incentives such as lane priority for electrified vehicles and low emission zones similar to those used in Europe. The government could also extend the dual credit system, which incentivises OEMs to produce a certain number of New Energy Vehicles per year, for example, it could be extended to include ‘Energy Saving Vehicles’, providing an additional supply-side incentive.
Because the exact nature of the structure of the policy has yet to be released, Interact Analysis has developed two scenarios which try to describe the impact of the updated roadmap. Firstly, the ‘level playing field’ scenario assumes that the ‘user-oriented encouragement’ incentives act on a level playing field for both ‘energy saving’ and ‘new energy’ vehicles. That is, an operator will receive the same level of ‘encouragement’ whether they choose a hybrid or a zero emission vehicle. In this scenario, it is expected that there will be a massive displacement of zero emission vehicles with hybrid vehicles relative to what had been forecasted prior to the updated roadmap. Within the level playing field scenario, Interact Analysis estimatee that hybrid vehicles will account for 43% of China’s electrified medium- and heavy-duty commercial vehicle market in 2030.
In the second scenario, ‘differential incentives’, it is assumed that the policy will be structured such that the incentives will be proportional to the cost of the vehicle. For example, fuel cell vehicles receive the greatest amount of incentives whilst mild hybrids receive the lowest amount. Within the differential incentives scenario, it is estimated that hybrid vehicles will account for 28% of China’s electrified medium- and heavy-duty commercial vehicle market in 2030 (both trucks and buses).
Both scenarios indicate a significant increase in penetration of hybrid commercial vehicles compared to Interact Analysis’ forecasts prior to the policy announcement which estimated hybrid vehicles will account for 1.5% of China’s electrified medium- and heavy-duty commercial vehicle market in 2030.
Not all commercial vehicles are created equal
Whilst it’s too early to say with any certainty what the policy will look like, Interact Analysis assumes there will be differences between various vehicle applications in terms of the penetration of hybrid vehicles. City buses, for example, are purchased by municipalities and tend not to be driven by typical market dynamics. Given the level of investments in charging infrastructure to support the uptake of battery electric vehicles, we expect that the city bus segment will remain primarily battery electric with a growing share of fuel cell vehicles over time.
Inter-city buses, on the other hand, tend to be purchased by commercial operators which are looking to generate a profit. Interact Analysis has already seen a huge decline in the inter-city battery electric bus market from over 20,000 units delivered in 2018 to an estimated 8,000 units delivered in 2020 due to the declining subsidies. Interact Analysis therefore expects the market will favour hybrid models given the lower up-front cost relative to battery electric models, especially within the ‘level playing field’ scenario.
Similarly, with hybrids now eligible to receive incentives, Interact Analysis expects to see a large uptake in hybrid heavy-duty trucks, especially in the ‘level playing field’ scenario. The Chinese market is highly price sensitive and the up-front cost of the vehicle often plays a big role in the purchase decision-making process especially in comparison to Europe and North America where the total cost of ownership is more important.
Demand for medium- and heavy-duty hybrid commercial vehicles outside of China
In 2019, the European Commission introduced a new policy requiring OEMs to reduce their fleet CO2 emissions by a specified amount in 2025 and 2030. The targets are expressed as a percentage reduction of emissions compared to the EU average in the reference period (1 July 2019–30 June 2020). Between 2025 and 2030, this will be a 15% reduction which rises to 30% from 2030 onwards.
Crucially, these targets have been set such that the OEMs are able choose what technologies to use in order to achieve the required targets. On one end of the spectrum, OEMs could implement mild hybridisation and emission reduction technologies across their entire fleets, resulting in a small reduction in CO2 emissions for all vehicles sold. On the other side of the spectrum, OEMs could sell a handful of zero emission vehicles to off-set the emissions from ICE vehicles which do not meet the required CO2 reduction targets. In reality, OEMs will likely sit somewhere in the middle of this spectrum, offering zero emission vehicles in countries and applications where it makes sense, whilst using technologies like mild hybridisation where going battery electric isn’t economical throughout the timeframe of the policy.
Interact Analysis is forecasting a strong uptake in mild hybridisation in Europe, especially within heavy-duty distribution and long haul applications. Whilst mild hybrid technology offers some cost benefits from a TCO perspective (Daimler claims its Citaro hybrid is able to reduce fuel consumption by 8.5%) the major driver in Europe will be the OEMs pushing this technology onto customers as a means to reduce their overall fleet CO2 emissions.
North America, on the other hand, has a different policy framework which disincentives OEMs from selling hybrid trucks. The Advanced Clean Trucks Rule, unanimously approved by the Californian Air Resource Board (CARB), requires OEMs ensure that a certain percentage of trucks sold in California are zero emission with the percentage increasing over time. Since the bill was passed, several other states have since followed suit. OEMs will therefore be disincentivised to sell hybrid vehicles as doing so will cannibalise their zero emission vehicle sales.
The hybrid commercial vehicle market had a bumpy start with most OEMs investing in hybrid vehicles in the late noughties and early 2010s, only for the oil price collapse to result in the demise of the first serious chance that hybrid technology had to make a big impact.
This time, however, things are different for two key reasons. Firstly, there is now a policy framework whereby OEMs are incentivised to sell hybrid vehicles, at least in Europe and China. Secondly, developments in mild hybrid technology have lowered the cost of hybrid integration and reduced the complexity of the system. Whilst CO2 emissions may be higher than in a full hybrid, the lower purchase price and maintenance costs will allow for greater market penetration, which has the potential to have a large CO2 reduction effect.