US fleet decarbonization would not just be good for the planet; it also makes compelling economic sense. Based on the total cost of ownership (TCO), battery electric vehicles (BEVs) will outperform their internal-combustion-engine (ICE) counterparts across all vehicle classes by as soon as 2025. Moreover, legislation such as the Inflation Reduction Act provides tax and subsidy incentives of as much as 30 percent of vehicle costs to switch.1 Consumers, meanwhile, are increasingly willing to reward companies that clean up their acts. As discussed in a previous article in this series, these tailwinds are fueling an appetite for fleet decarbonization—and creating impetus for decision makers to seek first-mover advantage.
While the benefits of full decarbonization are increasingly manifest, most companies will need to overcome operational and strategic hurdles to make the change. And some are understandably cautious about embarking as the market continues to mature. Many recall the compressed natural gas (CNG) transition of the last decade, which presented similar requirements to the current situation. Companies invested in depot infrastructure upgrades and new capital but were disappointed as CNG infrastructure failed to perform to expectations, and vehicles often underdelivered on range and efficiency. As a result, many fleets reverted to ICE, while CNG trucks produced low residual values, and infrastructure was often written off. With these memories still fresh, more than 50 percent of fleet operators in our recent survey rank infrastructure investment and vehicle costs as a significant obstacle to BEV adoption.2
Is this time different?
Given these dynamics, are there reasons to believe that this time is different? We believe there are. First, the potential operational efficiencies of BEVs are much less speculative than those of CNGs. They derive from the fact that electricity is, and will continue to be, cheaper than diesel. Right now, the multiple is around three to five times.3 Moreover, electricity prices are much less volatile than oil prices, reflecting the many alternatives for production (natural gas, coal, solar, wind) and price controls in many US states. Second, the uptimes and reliability of BEV charging networks are already on par with those of ICE refueling stations. Tesla’s supercharger network, for example, reported an uptime of 99.96 percent in 2021.4 Third, electric passenger cars are performing strongly in the secondary market, with residual values similar to those of ICE, suggesting light commercial vehicle (LCV) BEVs are a good financial bet. One reason is that powertrain longevity in both segments is about the same. Conversely, the secondary market for heavy-duty trucks (HDT) is more difficult to project. We suspect it may lag in the mid term, given the large and expensive batteries used in HDT powertrains.
These segment-specific dynamics are reflected in financial projections. On a TCO basis, LCVs are already “in the money,” and we expect medium-duty trucks (MDT) to deliver TCO parity with ICE alternatives in the United States by 2025 (Exhibit 1). HDTs will achieve parity toward the end of the decade, accelerated by tax incentives of up to $40,000 for new MDTs and HDTs.5
For operators owning a range of vehicle types, a more nuanced calculation of TCO benefit will be required. Indeed, wholesale adoption of battery electric technology may provide overall cost advantages that are not apparent through a linear assessment.
Of course, in any calculation, individual companies must make judgments that reflect their specific circumstances. However, the most prominent components of TCO differential across fleet subsegments are likely to include depreciation (net of asset price, subsidies, and residual value), fueling, maintenance (BEV battery and motor), and the fixed and operating costs of charging infrastructure. Across all vehicle classes, new BEVs are more expensive than ICE vehicles. However, this is offset by tax incentives and stronger residuals.
By 2025, factors including lower depreciation, fuel costs, and maintenance costs for LCV BEV will more than offset incremental charging infrastructure costs. MDT BEV will offer a TCO equivalent to that of its ICE counterparts: higher depreciation and charging infrastructure costs will be balanced by savings on fuel and maintenance. In the HDT segment, depreciation costs will mean the TCO will be about 2 percent higher than ICE equivalents (Exhibit 2).
Given the current uncertainty affecting energy markets, fleet operators will sensibly insert contingencies for price volatility into their calculations. As a rule of thumb, a 50 percent increase in the price of diesel, electricity, or hydrogen would lead to an overall TCO increase of 10 to 20 percent, even in the most fuel-intensive use cases. Electricity’s resilience to price fluctuations is a factor in its favor.
Of course, hard economics are one thing, while commercial perceptions are another. Our survey shows operators that already own BEVs are 9 percent more likely to think that charging costs are higher for BEVs than fuel costs for ICE vehicles—one reason is that many operators have failed to optimize their charging cycles.6 Furthermore, fleet operators often overestimate how long it takes for charging infrastructure to be installed, and this may cause unwarranted hesitation.7
Other constraints include the significant cash outflows and time required to purchase vehicles, upgrade depots, obtain permitting, and coordinate with utilities, particularly for smaller businesses. In addition, operators may be concerned that driver productivity may decline, at least initially, with longer shifts necessary to incorporate charging before route optimization is refined and charging speeds increase. Several operators cite concerns over peak-demand fees in electricity markets, which may increase costs as they strive to balance scheduling and charging needs. Suboptimal charging practices can also impact BEV residual values, because battery quality and life span will degrade over time. Additionally, training will be required for maintenance staff, adding another cost to the transition process.
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While these concerns are natural, they can be at least partially assuaged through detailed analysis of potential transition pathways. For example, modeling of potential savings in the parcel delivery (LCV dominated), food products (MDT dominated), and full-truckload shipping (HDT dominated) industries shows that savings are available in the short term in the first two cases, and that these will accelerate over time. In the third case, savings will come later, but they will also accelerate up to and beyond 2035 (Exhibit 3).
Despite a still-maturing ecosystem and some regional bottlenecks, many companies across the fleet value chain are optimistic about the outlook for electrified transport, with more than 50 percent planning to fully decarbonize their fleets by 2027, our survey shows. In addition, OEMs are increasingly driving adoption by ramping up BEV production, while utilities and charging network providers are scaling up infrastructure, which should accelerate depot refits. Moreover, fleet management service (FMS) providers are adding electric-vehicle capabilities in areas including infrastructure upgrade project management, charging optimization, and vehicle maintenance. In fact, more than 60 percent of surveyed operators plan to partner with FMS providers and almost 50 percent with EV charging infrastructure providers to accelerate their transitions.8
Getting to carbon-free commercial fleets
The journey to a fully decarbonized US commercial fleet will be complex and risky, but the cost benefits of electrified transport often create a powerful counterweight to inertia. Operators should apply cost modeling to their unique operations and in parallel develop the skills bases that will optimize the BEV rollout. To that end, some leading companies have found it is useful to strike partnerships with electric-vehicle ecosystem players. Those that manage these challenges effectively stand to deliver real benefits, both to the climate and to their long-term financial performance.
