This is not the time to obscure the e-car pathway

This is not the time to weaken any policy lever needed for rapid car fleet electrification or send confusing policy signals to detract the car industry from scaling up investments in electric cars. Electrification is a paradigm shift that needs committed capital, assured market and long term policy visibility to meet ambitious decarbonisation targets by 2030.

Yet, after the recent reportage on the car industry failing to meet the fuel economy target under the Corporate Average Fuel Consumption standards (which is meant to improve fuel efficiency and reduce carbon dioxide (CO2) emissions), the market is abuzz with growing demand for more incentives and tax breaks for intermediate fuel saving technologies for internal combustion engines (ICE).

If the effective differential between the quantum of incentives available for electric cars and those for improved and advanced fuel efficient technologies for ICE vehicles is reduced, the market will remain locked in the oil paradigm for many more years and delay the electrification process.

This concern matters more in the personal car segment which is different from electric buses, autos and two-wheelers. Personal cars do not qualify for direct central government demand incentives under the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme. This policy has prioritised, and rightly so, support for electrification of public transport, paratransit and commercial vehicles to make mass commuting carbon neutral.

The electrification of the personal car segment, therefore, has to be driven by other policies that require more stringent energy and CO2 savings for quicker uptake of electric cars. However, some fiscal and non-fiscal incentives are also available from the state governments.

Given the growth spurt in car numbers and its projected role in escalating future transport oil demand — as the International Energy Agency (IEA) predicts, cars need to be a big part of the zero emissions vehicle (ZEV) solution.

It is therefore encouraging to see the concerted demand from the electric vehicle (EV) industry this time for a broader set of fiscal support from the upcoming Union Budget. These include the enhancement of FAME scheme, GST parity for Li ion batteries, and financial incentives including tax credits, subsidies, and low interest loans.

This articulation is important as the next phase of upscaling of the electric vehicle market would need more innovation and product development — especially in batteries — to meet a range of performance criteria related to energy density, safety, and durability among others under real world operations and to have a more matured market. The entire EV ecosystem, including charging infrastructure and R&D, would also need stronger support.

This also makes the current crossroads in the ongoing transition very sensitive and delicate. If the policy focus shifts more towards intermediate ICE technology solutions, without linking them with stringent emissions performance benchmarks, it will undermine both industry interest in EVs and also knock out the competitive edge of the EVs.

Even though, the current market share of electric cars is very low — less than one per cent, the industry outlook is more favourable. The year 2023 has seen more e-car models in the market. The BloombergNEF estimates that Indian automakers have committed nearly $5.4 billion in investments to expand manufacturing facilities and the key domestic players are expanding the production base. Policies now need to give the extra push.

The worry 

The media is consistently reporting about several car makers missing the industry-wide fuel economy target of 113 gmCO2/km for 2022-23 and facing the stringent penalty under the newly amended Energy Conservation Act.

If the reported information surfacing in the media is any indication, then the industry-wide emissions for the reporting year ending March 2023 is 116.78 gm CO2 per km against the upgraded norms of 113 gmCO2/km, notified by the Union Ministry of Road Transport and Highways.

The market watchers worry that this setback may heighten the demand for more incentives for intermediate and incremental technologies for improving fuel efficiency of ICE vehicles to be able to comply with the fuel economy norms. That may affect electrification pathways.

A part of the ICE industry is said to be missing the regulatory mark because of the steady shift of the market towards heavier vehicles and reduced share of diesel vehicles.

The International Energy Agency has pointed out that in India, diesel power trains (supposedly more fuel efficient than petrol) have declined from 47 per cent in 2017 to 40 per cent in 2019 (latest media reports indicate 12 per cent share now); average light duty vehicle weight has increased by 13 per cent since 2005; and the share of SUVs have increased from 17 per cent in 2005 to 31 per cent in 2019. This has come with a high fuel economy penalty.

To offset this penalty, reliance on incremental CO2 reduction technologies and hybridisation of ICE powertrain will increase. That is a very legitimate approach and such application at scale can make ICE more fuel efficient at a lower costs and maximise fuel savings. Currently, strong hybrids and flex fuel vehicles have lower taxes compared to petrol and diesel cars. Strong hybrid cars qualify for FAME subsidy. Along with the available incentives, the cost of these proven and established technologies can be further mitigated by the industry and consumers.

Going forward and as a public policy, the electric drive train however requires a much stronger and unambiguous policy and fiscal support to stay on course and meet the cost of the makeover.

This will also require further tightening of the fuel economy norms and tweaking of the super credits to hasten electrification. Currently, the car industry earns extra points or super credits for adoption of fuel saving technologies for the purpose of calculating the Corporate Average CO2 performance of the fleet sold to report compliance with the fuel economy norms. Super credit for strong hybrid electric vehicles is 2.0; for plug-in hybrid electric vehicles (PHEV) 2.5; and for pure electric vehicles it is 3.0.

This means while calculating the fleet average CO2 emissions one pure electric car counts as three vehicles, a PHEV as 2.5 vehicles, and a strong HEV as two vehicles. Thus, the industry can score more if they sell more pure electric, strong hybrids and PHEVs. This differential scoring needs to be more effective and favourable towards pure electric models.

Similarly, an extra 0.98 points for each CO2 reduction technologies that are allowed for accounting include regenerative braking, start-stop system, tyre pressure monitoring system, 6 or more speed transmission. Even though these provide more flexibility to the industry to score higher, tying up incentives with these standardised and basic approaches weaken the impact of the regulation.

Moreover, to maximise fuel savings from ICE models, the time has come to link incentives/super credits for strong hybrids, PHEVs with specific performance benchmarks for expected fuels or CO2 savings. Currently, it is said these models are about 25 per cent more fuel efficient than ICE models. But specific CO2 emissions target can ensure that a significant electric range is achieved while driving hybrid car models.

That is the global trend. For instance, in Europe, from 2020 to 2022, super-credits system apply to zero- and low-emission vehicles (ZLEV) in which only cars with zero emissions or emissions of less than 50 g CO2/km qualify. It is said that such a benchmark can be achieved only if at least 70 per cent of the overall mileage of the car is on the electric motor. As driver behavior cannot be controlled, actual emissions can be much higher. Indian regulations do not have such effective qualifiers yet.

If not made more stringent, fuel economy norms cannot drive electrification. As the IEA has stated the average fuel consumption of new light-duty vehicles sold in 2018 was roughly 9 per cent ahead of the target for that year and that the industry could comfortably achieve that target. Similarly, ICCT found  that the car fleet was only 7 per cent away from meeting the target of 2023. Only a small improvement or very small electrification of about 1-2 per cent would suffice to meet the target.

Yet, the industry was off the mark in 2023.

Electrification of the car segment at a scale is also necessary for other fiscal support for ZEV to work better and for the ecosystem development. For instance, if the government is spending so much on production linked incentives for Advance Chemistry Cell (ACC) Battery Storage for domestic manufacturing of 50 gigawatt hours (GWh) of ACCs, four wheelers including electric cars need to multiply manifold.

This is simply because, and as the ICCT estimates, the FAME incentive for 1 million electric two-wheelers can create demand for only about 2.3 GWh of battery cells. The larger demand for GWh scale of battery development will come from four wheelers as their battery capacity is about 10 to 20 times larger than the electric two-wheelers. Only scale can make the PLI scheme more viable by 2030. Electric four-wheelers will have to be central to the change to also provide the scale of business and market needed to support India’s growing stakes in overseas mining for critical minerals and to make that investment viable at home.

A scalable electric four wheeler market can further catalyse the desired  expansion of charging infrastructure, high end development of batteries, and diverse financial instruments.

Clearly, as the electric car industry has to prepare for firmer regulatory targets for decarbonisation and upscaled market by 2030, incrementalism within the ICE paradigm is not the only option any more. Unbox the big change.