• Author: Dr Michael Wynn-Williams is the author of Surfing the Global Tide: Automotive Giants and How to Survive Them. He lectures in international business at the University of Greenwich.

After many false dawns, it is beginning to seem that the sun is at last rising on the electric vehicle (EV) market.

We are being assured by the industry that EVs will become affordable and convenient within a few years.

Their calculations, though, have so far ignored one vital piece of information: what will the depreciation rates look like as these wunderkind descend into the used vehicle market?

As all car manufacturers know, depreciation is the silent killer that can decimate the most positive of cost projections.

A pilot study at the University of Greenwich has set out to provide a forecast of EV values in the used market.

First indications are of a depressing rate of value destruction over the years. Most alarmingly, beyond a certain age demand may be almost non-existent.

Death by depreciation

The buyer of a new car must pay twice. The retail price for a new car needs to account for the costs of its development and production.

Yet only when it is sold on into the used market does the full purchase cost become apparent. If the residual value has sunk by a wallet-draining amount, then the car is clearly viewed by the used market as a toy for the rich.

It is worth remembering that this destruction of value is not compulsory.

The problem for the traditional car, with its internal combustion engine (ICE), is that the risks surrounding the condition of its powertrain increase with age.

Each year of additional wear and tear brings it that much closer to the mechanical cataclysm that will end its life.

The uncertainty over when and how this will happen is reflected in the sinking depreciation profile.

This depreciation profile is not a straight line to zero but a curve, with the steepest decline in the early years.

The early plunge is because the nearly new car suffers the most in comparison with the new.

The buyer of a new car can choose their exact specification, while the used car buyer must accept what is available, including any uncertainty over its condition.

After a decade or so, the car settles around a steady terminal value, deviating only slightly according to tangible evidence of condition rather than age.

Sudden death, though, awaits those cars that suffer the mechanical catastrophe that puts them beyond economic repair.

The post mortem value then collapses to near zero, which is its scrap value. EVs are thought by some to have an advantage in this regard since the electric motor is expected to be long-lived.

However, the battery pack has a limited lifespan. The expense of a replacement battery pack approaches that of an ICE powertrain, so the condition of the battery defines the terminal value in the same way.

Keith Johnston, founder of EV consultancy ConnEVted, believes that residual values will be driven by battery life cycles.

Liberty Electric Cars offers a 300,000 mile warranty on the battery pack for its custom Range Rover EV so it should outlast the rest of the car.

Nevertheless, the new Nissan Leaf and the Chevrolet Volt EVs are looking at life cycles of up to 10 years.

From that point on, the used EV buyer is purchasing a battery pack with a car attached.

There is, though, a malevolent spectre waiting in the wings for the EV, and sudden death could come at an early age.

The assumption with ICE cars is that it is always technically possible to own one, no matter what the age the vehicle because all ICE vehicles are fuelled and maintained in broadly the same way.

This means that buyers suffer no impediment to owning an ICE vehicle. Tragically, this is not the case for EVs. Indeed, it is quite possible that the market for ageing EVs simply does not exist.

Obviously, EVs need access to charging stations but there is a paucity of public sites. Charging EVs at the workplace has been put forward as an alternative, but in practice this will only help the minority.

Rising traffic congestion in cities is restricting the use of any car for commuting to work, and any favour shown to EVs can only be temporary.

Even if the traffic jams were tolerated, inner city workplaces do not have the parking capacity for the commuting public. In any case, charging EVs during peak power usage negates many of the environmental advantages.

As Keith Johnston admits, 80% to 85% of potential EV owners expect to be charging their vehicles at home.

The installation of home charging stations is reasonable when the new buyer has their own off-street parking, but used buyers often park their vehicles in the street.

As any urban dweller knows, it can be almost impossible to guarantee reliable access to the same parking space.

Furthermore, where a home station can be installed, the fixed cost of doing so must be added to the cost of buying the used EV.

Since an old ICE car carries no such additional cost there is a compelling reason for used buyers to postpone the purchase of an EV indefinitely. The possibility of sudden death for used EVs at less than 10 years old will dramatically steepen the depreciation profile.

Researching EV depreciation

The first challenge facing the University of Greenwich research pilot was the inevitable lack of existing EVs in the used market upon which to base any predictions of future residual values.

Indeed, only one model has been widely available over the past few years and that is the Reva, now manufactured by India’s Mahindra Group.

Also known as the G-Wiz, it is a diminutive four-seat city car. The Reva uses older technology, and has a shorter driving range than the latest EVs.

The fact that Reva may not be representative of the Chevrolet Volt or the Nissan Leaf is immaterial.

As in the mainstream market, the assumption being made is that Reva buyers have a common purpose in buying the car, only their budgets separate them.

As the cars age, the uncertainty relating to ownership costs increases which then puts downward pressure on the used value.

If the uncertainty related to ageing EVs is greater than for more conventional cars, then the depreciation will be relatively steeper.

To make the comparison, two other models with solid environmental credentials were selected.

The Toyota Prius was chosen as representative of hybrid vehicle buyers, and the Smart ForTwo was selected as an example of a city car.

The price data collected for all three vehicles was obtained from private sales, unsupported by dealer warranties, discounts or trade-in allowances.

The depreciation profile was then calculated from the median list price of a new model.

Only in the case of the Prius was there a model changeover during the period under study.

No homes for old EVs

For the moment, EV owners are enthusiasts who are inspired with a missionary zeal to promote
the vehicle’s environmental virtues.

As Barry Shrier, founder and chief executive of Liberty Electric Cars, puts it: “A leap of faith is required today to buy an EV”.

Mainstream buyers will not be so indulgent and they will have the usual motoring demands: comfort, convenience and performance.

The new EVs are designed to meet these needs, but this also brings them into direct competition with the established ICE vehicles.

The lessons learned from the depreciation profiles have been applied to the Nissan Leaf to forecast the private selling prices. In the UK, thanks to a government subsidy of £5,000, the car is priced new at £23,990 including delivery charges.

At every point in the depreciation profile it is necessary to factor in the cost of installation for a home charging station since the buyers will be making a new commitment to EVs. This is assuming that installation is even possible when off-street parking is decreasingly likely.

The Leaf’s battery pack is said to have a life of five to 10 years, so it would seem reasonable for the terminal value to occur in year eight.

However, the main drag on the Leaf’s value is not the cost of the replacement battery pack, but the chances that the market for it will simply evaporate.

In the urban areas for which EVs are primarily intended, the installation of home charging stations becomes increasingly difficult as the EV descends with age into the more budget conscious end of the market.

The Greenwich research is proposing that EVs will suffer a sudden death around the time the replacement battery pack is due, a looming fate that will weigh heavily on the whole of the depreciation profile.

Without a massive investment in home charging, there is the grave danger that EVs will become toys that only the rich can afford.