Derisking EV financing starts with battery & needs systemic improvement. But first, we need low cost financing

As of July this year, an Ola S1 Pro (e-2W) had a starting price of Rs 1.29 lakh while petrol two-wheeler Suzuki Access 125 was priced at Rs 79,899. With a price gap of around Rs 50,000, the electric two-wheeler market segment is steadily inching closer to its internal combustion engine (ICE) counterparts in terms of upfront cost, which has historically been the major barrier in EV uptake, especially in the two-wheeler and three-wheeler segments. However, there are still miles to go.

Despite nine years of the FAME subsidy, a demand creation incentive programme, the scale achieved in the electric vehicles (EV) industry has been able to bridge the cost gap between a representative ICE and EV in India to almost Rs 50,000. This gap is still too large to further the adoption of EVs in the country. 

The Indian common man doesn’t have a lot of disposable income. India’s per capita disposable income was Rs 2.14 lakh in 2023-24. Clearly, it is impossible to ignore the role of financing in EV purchase. As the industry gears up for FAME 3, it is worthwhile to say that the role of interest subvention in India’s electrification journey has been complementary to that of its subsidies. 

Delhi, which saw the third-largest EV penetration among all the states in India at 11.20 per cent in 2023, offered an interest subvention of 5 per cent to e-autos, e-rickshaws, e-carts and goods carriers. This greatly helped in the uptake of EVs in these segments.

Interest subvention is a powerful tool deployed by governments to encourage demand through low-cost loans. However, EV financing remains affected by the uncertainty around residual value of the vehicle. As with any depreciable asset, the value of an EV reduces with time. 

Typically, interest rates increase with increased uncertainty and risk associated with end-of-life value of the asset. Therefore, it is important for the financier to know the end-of-life value or residual value of an EV before disbursing a loan for the same.

Battery is the most expensive component in an EV, accounting for at least 40 per cent of its cost. Residual value of the EV is usually determined by the estimation of state of health (SoH) of its battery at the end of its lifetime. SoH is an indicator of capacity loss or cell ageing. It is the ratio of the current maximum charging capacity of an EV to its maximum charging capacity when it was brand new. 

Battery degradation or cell ageing often exhibits a phenomenon called ‘knee point’ which is a sudden end to the life of the battery. Over time, the battery’s capacity degrades uniformly, but it suddenly drops to very low at 60-70 per cent of its cycle life. Cycle life refers to the number of charge-discharge cycles that the battery can undergo with acceptable performance degradation. 

Studies are underway to develop appropriate models to predict knee point with the help of large datasets. This requires setting up data banks. Progress in the prediction of knee points will bring down the risks associated with battery operations and lower the financing cost of EVs. 

Additionally, there were a series of fires in 2022 in India and before that in the US and China. This increased the apprehensions and uncertainty about EVs in the banking and financing sectors. However, standards, namely AIS 156 and AIS 038, were introduced immediately after the fires to allay the public's fears.

Factors like having a sure thermal stability of the battery would also play a role in affecting EV financing. Multiple R&D milestones have been achieved since then, making the battery both more secure and predictable.

Another strategy is to de-risk the industry at the macro level. NITI Aayog, the government’s planning agency, said that they are working to de-risk different aspects of the EV ecosystem at the same time. As part of a derisking exercise, the World Bank announced plans to provide a $1 billion line of credit to the State Bank of India to encourage the production of batteries and EVs in the country. Batteries manufactured in the country will go a long way in reducing upfront cost.

As Mansha Sehgal, transport specialist at the World Bank, said at an event hosted by automotive industry news website ET Auto and International Council on Clean Transportation, “To solve for the perceived and actual risks associated with EV financing, it is important to create an enabling environment for financiers through concessional financing, and de-risking solutions such as liquidity facilities, partial credit guarantees and bankable business models.” 

This will work to reduce EV purchase price and increase customer demand, thereby triggering the desirable loop of increased EV sales, lower manufacturing costs and stimulate more innovation.