TRANSFORMATION OF THE MOBILITY SECTOR

The mobility sector is the leading source of greenhouse gas (GHG) emissions and it is responsible for a large proportion of urban air pollution. As per WHO an estimated 3.7 million premature deaths are attributed to ambient (outdoor) air pollution. Road transport is estimated to be responsible for up to 30% of particulate emissions (PM) in European cities and up to 50% of PM emissions in OECD countries – mostly due to diesel traffic. In addition, the emissions driven by the transport sector are the ones with the highest growth rate. To mitigate part of this increasing environmental risk, innovative solutions regarding cleaner vehicle technologies have been proposed, investigated and so far partially implemented in the last decades, which should have the potential to combat air pollution and climate change.

The mobility sector, and more specifically road transport, is undergoing a major transformation based on four different innovations: connected, electric, autonomous and shared vehicle technologies. Electric vehicles are currently seen as the main disrupter for the mobility sector, but the global fleet of electric vehicles is still relatively low compared to fossil fuel-based vehicles. The potential environmental impact of electric vehicles has various important levers, such as little or no pollution generation, less dependence on fossil fuels, reduction of greenhouse gas emissions, and lower operational and maintenance costs compared to conventional vehicles since they have very few moving parts as compared to ICE vehicles.

Overall, this leads to the mobility sector, and more specifically the road transport sector, to have three major sustainability goals to realize sustainable mobility for all: (i) reduce the environmental footprint by changing the energy mix and creating more sustainable solutions (e.g., electric vehicles), (ii) ensure mobility for all by creating business models everyone can benefit from, and (iii) realize more efficient raw material consumption by having increasing efficiency throughout the supply chain.

Realizing these industry-wide sustainability goals has various environmental and societal benefits recognized by the UN Sustainable Development Goals, such as:

• Good health and well-being (#3) and Sustainable cities and communities (#11) by reducing air pollution, which is especially relevant for the larger cities in India and China where this has become an increasing fatal risk
• Responsible production and consumption (#12) by using raw materials more efficiently throughout the supply chain
• Climate action (#13) by moving from dependency on fossil fuels to more sustainable alternatives such as solar and wind power via electric vehicles
• Partnership for the goals (#17) by cooperating with the entire supply chain (industry coalitions) to provide a better vehicle and service to the society

With plenty of benefits available, the transition to a more electric fleet – seen as one of the major sustainability trends currently going on in the mobility industry – hasn’t gotten the traction yet to dominate the mobility sector, with a current share of EVs in the EU or US fleet of approximately ~2%, and even less in other parts of the world. People are still skeptical about the use-case of this class of vehicles as prices are still relatively high, availability of charging stations is limited, and electric charging takes longer than conventional refueling. Meanwhile, many companies rely on government incentives to promote sales, through grants to reduce purchase prices or tax reduction – a strategy, which is not sustainable in the long term.

Therefore, to achieve the industry’s sustainability goal of realizing sustainable mobility for all, the industry is investing in various initiatives:

• R&D investments in EV production and charging technology
• Reduction of electric vehicles costs
• Increase in EV efficiency (making it run for larger distances)
• Customers education about the environmental friendliness of this technology

In the last years, those initiatives have helped to increase awareness and improve technology; EV sales have increased in the past three years, particularly in China, Europe, and North America. However, the impact in reducing pollution and improving cities’ and community’s climate conductions is still far from what is expected.

The EV potential for contributing to the UN sustainable goals, giving all the environmental benefits when compared to conventional cars, is tremendous. Nevertheless, to achieve all the benefits of EV and contribute more to the sustainable agenda, the industry needs to overcome challenges:

• Low demand – the industry is currently more focused on private sales rather than targeting low hanging fruits, such as shorter commutes, public transportation. Increase in demand could also be driven by an increase in sales to public transport fleets.
• High upfront investments – the development and purchase of those cars require very expensive and high upfront investments, with higher costs related to the battery purchase and replacement, recharging infrastructure, etc.
• Lack of charging infrastructure – in order to support the increase in demand, companies and government also need to invest to increase the current charging stations
• Long charging times – although the industry is coming with new charging networks that reduce the charging hours, those technologies are not yet disseminated, and customers still must wait long hours to charge their vehicles.

In order to solve the above-mentioned issues in promoting clean mobility, the industry is working on different business models to reduce the amount of change, which a customer has to make to adopt these technologies. There are two particularly innovative solutions currently being discussed and implemented:

• Battery leasing – Many OEMs and vehicle manufacturers are planning to separate the ownership of the vehicle battery pack from the vehicle itself, thereby reducing the amount of initial investment the customer has to make while switching to electric transportation. The battery is now thought of as an additional fuel stock for the customer for future usage (since the cost of operating the electric vehicle is so much lower than a petrol/diesel vehicle) which can be financed by either the vehicle manufacturer or the dealer or a battery manufacturer.

 

Figure 2. Leased Electric rickshaws in India

 

• Battery swapping – This particular business model is aimed at reducing the waiting times for re-charging a vehicle. Consumers who are used to refueling their vehicles within a few seconds do not like the fact that they might have to wait for several minutes (if not hours) for getting their electric vehicle refueled. Currently, swappable batteries can be easily integrated into smaller vehicles such as 2-wheelers and 3-wheelers as the weight of the battery is lesser in these vehicle categories (see figure 1). With further R&D, the process can be automated to support larger battery packs being used in cars and buses. Swapping should ideally take less than a few minutes. The depleted battery packs can then be charged by the swapping center at their own convenience and with optimal conditions.

 

                                                                          Figure 3. Battery Swapping for 2-wheelers

 

Adopting these business models will help reduce risks for the end consumers and drive wide-scale adoption of clean mobility solutions. Currently, the cost of an electric vehicle is almost twice the cost of a similar sized gasoline/diesel vehicle. Keeping the battery ownership out of the picture will bring this cost to the same level as existing ICE vehicles.

In addition, the convenience of the customer will increase when business models such as battery swapping reach mass-market adoption. The recharging time of your battery will go from 10–30 minutes at fast charging stations to less than 5 minutes at battery swapping stations. In addition, it is much easier to move small battery packs rather than complete vehicles to the appropriate charging/swapping stations. Furthermore, as the batteries are charged at the swapping centers, the environmental conditions during battery charging and in order to balance the grid can be maintained much more properly at centralized swapping center locations. This would lead to longer-lasting batteries, which could result in better resource utilization and faster return on investment.

The reduction of air pollution is one of the other major benefits which will become more visible once electric mobility usage increases. Based on our current energy mix, this still means that we are only shifting pollution away from the cities to the point of generation of electricity, but this at least already leads to major environmental benefits in the cities. Especially in the larger Chinese and Indian cities air pollution is one of the key problems faced as it is leading to a significant number of fatalities each year. Also, by centralizing the pollution problem to the energy plants, the problem of emissions can be tackled more effectively, either through carbon capture (and storage or utilization) or by changing the energy mix overall from fossil fuels to more sustainable alternatives.

Another major benefit is around the social impact realized by making affordable mobility innovations available to all. In India, for example, manual rickshaws (used for carrying passengers) are being rapidly replaced by electric rickshaws with swappable battery packs. The increase in costs for a rickshaw owner due to this transition is kept in check by different leasing models, leading to faster adoption. Electric rickshaws save the drivers the pain of manual labor in extremely oppressive climatic conditions. These vehicles are faster, enabling the rickshaw owners to complete many more trips as compared to traditional vehicles and hence, making much more money. Also, driving an electric rickshaw instills a sense of pride and social status in their minds, which further promotes widespread adoption.

Once these business models are implemented successfully, they will drive up EV adoption, making the technology more affordable, and enabling environmental and societal impact at large. The main highlight to mention is that based on our current EV fleet and related costs, as the number of electric vehicles increase, prices of battery packs will come down drastically due to economies of scale and more advanced technology development. More EVs on the road will also further reduce the inhabitance of non-adopters and will also increase the utilization of public chargers, improving their profitability. Companies and governments will be more willing to invest in such infrastructure, which will again fuel the adoption of such technology in private cars, buses, and trucks.  Overall, these solutions will be extremely successful in driving wider adoption of electric vehicle technology and it will also provide a backbone for the growth of the next stage of innovation in this sector – autonomous and shared driving. As electric vehicles are completely digital making, they are the ideal candidate to implement level 4 autonomous driving. Once this is achieved, the need for owning the vehicle will diminish rapidly as people will be transported from homes to offices by mobility providers leading to lesser congestion and reduced driving accidents, which overall again accelerates the adoption of electric vehicles to the overall benefit of the environment.

 

Figure 4. Autonomous driving

 

Next, to the advantages of these business models, there are also some risks and concerns such as:

• Limited adoption – There is a risk of limited adoption of leased batteries as car owners might want to keep full ownership of their car and everything in it, which may result in low adoption of this BMI. Historically, consumers have always either fully owned or fully leased a car, meaning they are not educated yet into the opportunity of leasing just a part of your car (i.e., battery). Hence, marketing needs to be done in order to mitigate this risk and ensure that customers understand that this business model will meet their demands around realizing a lower levelized cost of electricity (LCOE) whilst supporting the UN sustainability goals.
• Accelerated deterioration – There is a risk of accelerated deterioration of batteries as the consumer behavior incentives are changing. If you own the battery of your electric vehicle you have an incentive to use it in a more sustainable manner to ensure a longer However, if you lease a battery, you could argue that the customer has an incentive to optimize utilization of the battery (e.g., car sharing) which could accelerate battery deterioration at the cost of the OEM.
• Increased capital expenditures – There are various capital cost elements related to the implementation of leasing and swapping. On the leasing, the OEMs will need to invest heavily in order to own all the batteries they will lease ours. On the swapping, the OEMs need to create the infrastructure with the swapping stations which will also require significant investments
• Transition to servitization – There are costs associated with building up the servitization capabilities required for these new business model. In order to maintain a leasing business model, you want to optimize your asset base and utilize it as long as possible in order not to replace them with new batteries. Therefore, services provided such as repair and maintenance will become very important, but this will come at a cost.
• Lacking afterlife opportunities – With the upcoming markets of reusing (e.g., in secondhand cars, as grid storage), refurbishing, or recycling batteries there is a concern around whether enough business potential can be found in these secondary markets. This is relevant as with the accelerated adoption of electric vehicles the number of batteries getting available on the secondhand market will skyrocket, so new afterlife demand has to be created on the scale in order to meet this increasing supply of used electric vehicle batteries
• No industry standards – Currently, the automotive parties investing into electric vehicles will design their car, including batteries, in a unique manner to their brand, which limits the cross-coordination of the OEMs to create one uniformly accepted type of batteries. The risk of not having an industry standard is that the secondhand battery market and the swapping infrastructure will depend on the brand, limiting the industry to fully benefit from the overall market potential.

Next, to these risks and concerns, there are also barriers to entry. The main barrier for the OEMs will be the capital costs required to invest in the new asset base of batteries and the new swapping infrastructure. Other barriers include the industry coordination regarding standardization of the batteries and swapping stations.

Fortunately, there are some ways in which these risks can be mitigated:

• Change price incentives – With the typical leasing model with fees per year you create the incentives mentioned before around the accelerated deterioration, By changing the pricing of the leasing from years used to energy used, you can basically price the customers based on kilometers traveled. This will provide a more fair judgment of the leasing cost and will eliminate the accelerated deterioration incentive.
• Educate the customer – With a strong marketing campaign around the benefits of battery leasing, focusing on cost reduction and sustainability impact, the end customer can be educated on the benefits of leasing. This could mitigate the risk around the limited adoption of the leasing model
• Forming industry coalitions – With the risks around the potential lack of standardization in the industry, coalitions could help mitigate that risk, focusing on one type of battery, one type of battery connection, and one type of battery swapping stations. If achieved, this could significantly reduce the risk for one OEM to invest in these business models as batteries become more interchangeable

Also, regarding the social and environmental impact, there are some remarks to be made on whether the full adoption of electric vehicles enables a more sustainable future.

With the increased adoption of EVs, the usage of rare earth metals will also increase. With a business model supporting and thriving on the increased usage of batteries (e.g., Li-Ion batteries) will increase demand for the raw materials going into the batteries. With the current technologies available, we use many rare earth metals which have limited availability and which can result in environmental unfriendly mining.

On the large stock of excess used batteries, more and more batteries in demand and the secondhand market of batteries getting larger and larger we might create a serious bulk of used batteries which will require a lot of space to store. If this comes at the cost of the current flora and fauna this will have a negative impact on the environment and the society as a whole.

Finally, the growing market for electric vehicles might come at the cost of jobs in the traditional ICE industry – With shifting industries from traditional ICE cars to electric vehicles a whole segment of jobs might disappear. Therefore, the discussed business model which might accelerate the transition to electric vehicles will come at the cost of the ICE industry and ICE related jobs.

Overall, the electric mobility space and upcoming innovations provide some very exciting methods to reduce our environmental impact and to gain positive societal benefits. These benefits do come with some crucial dilemmas on some risks and concerns, which have to be carefully considered as well.

Sources:

https://www.who.int/sustainable-development/transport/health-risks/en/

https://www.energysage.com/electric-vehicles/101/pros-and-cons-electric-cars/

https://www.weforum.org/agenda/2019/03/three-ways-to-speed-up-the-transition-to-electric-vehicles/

Team:

Danielle Dennewald, Vishesh Mehra, Boris Naar, Julia Nazareth Ferreira