YES Bank and TERI joint Report on Electric Vehicles by RushLane

TITLE

Electric Vehicles: Challenges & Opportunities in India

YEAR

January 2013

AUTHORS

Lead authors : Samir Karnik, Nitin Sukh (Responsible Banking Team, YES BANK) Contributors : Agneev Mukherjee, Sarobjit Pal, Akshima Tejas Ghate, Sangeetha Ann Wilson (TERI BCSD)

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: +91 22 6669 9000 : +91 22 2497 4088

Northern Regional Office 48, Nyaya Marg, Chanakyapuri New Delhi – 110 021

TERI-Business Council for Sustainable Development (BCSD) The Energy and Resources Institute (TERI) Core 6C, Darbari Seth Block, Habitat Place India Habitat Center, Lodhi Road New Delhi - 110 003 Tel Fax Email Website

Tel : +91 11 6656 9000 Email : responsible.banking@yesbank.in Website : www.yesbank.in

: : : :

(+91 11) 2468 2100, 41504900 (+91 11) 2468 2144, 2468 2145 bcsd@teri.res.in www.teriin.org/bcsd

MESSAGE The traditional approach of the banking sector to sustainability is often regarded as lacking in proactive initiatives. However, several banks have recently adopted innovative and forward looking strategies to deal with opportunities associated with sustainability. They have developed new products such as ethical funds or loans specifically designed for environmental businesses to capture new market opportunities associated with sustainability. This very joint endeavor between TERI BCSD and YES BANK to explore Electric Vehicles as an option of sustainable mobility that has the capability to significantly lower emission levels including carbon dioxide emissions which is an encouraging beginning. Rapid urbanization, rising per capita incomes, growing aspirations of an expanding population and sprawling cities have resulted in transport demand increasing at a rate much faster than the rate of growth of transport infrastructure. Indian cities are witnessing an exponential increase in the use of personal transport and a steady decline in the modal share of both public transport and non-motorized transport. There is a growing realization, both internationally and nationally, that the current trends in urban transport are unsustainable and should be arrested. Urban transport should move along a low carbon and sustainable pathway. Several international initiatives like the SLOCAT (The Partnership on Sustainable, Low Carbon Transport), and major events like the United Nations Conference on Sustainable Development, 2012 (Rio+20), etc. have highlighted the challenges associated with meeting urban mobility demand in a sustainable manner. In India, the National Urban Transport Policy, 2006 aims to move future transport development in Indian cities towards a sustainable and low carbon trajectory. Current policy promotes investments in public transport and non-motorized transport infrastructure so as to advance the agenda of sustainable mobility. While it becomes important to plan for systems of public transport, and non-motorized transport for promoting sustainable mobility, it is also critical to ensure that personal modes of transport i.e. cars and two wheelers embody energy efficiency and low-carbon intensity. This is important because we are going to witness an explosive increase in the number of personal vehicles in our country. It is therefore crucial that the new vehicular fleet in the country produces low environmental impacts. Electric vehicles, though not yet popular in India, are an important solution to addressing the issue of vehicular pollution. The country has recently witnessed the unveiling of the National Electric Mobility Mission Plan 2020 by the Hon'ble Prime Minister, Dr Manmohan Singh. This move is significant at this juncture considering the country cannot continue its heavy dependence on personal modes, which run on petroleum products (petrol and diesel) with implications for India's energy security and CO2 emissions. It is important that we diversify our fuel mix in favour of clean fuels. Electrification of vehicles certainly offers such potential provided the electricity is generated from clean sources of energy. Going forward, it is very important that any plan for electric vehicles is implemented in an integrated manner in consonance with our plans for electricity generation and distribution and urban infrastructure planning. Major R&D initiatives are needed to ensure that the penetration of electric vehicles is accelerated. All key stakeholders including industry, government, and financial institutions will have to work together in this endeavour. I compliment YES BANK for undertaking this study and for publication of this Knowledge Paper.

Dr R K Pachauri Director-General, TERI

FOREWORD This well-researched knowledge paper advocates the incremental transition of private transportation in India - from being driven by the internal combustion engine to electric drive trains. YES BANK and TERI BCSD are of the strong view that this revolution in Indian personal transportation will open up significant business avenues, and corresponding financing opportunities. It will also address the critical issues of India's long term energy security and reduce the environmental impact of fossil fuel driven vehicles, though only at the tailpipe. However, there are some ground realities in India and globally that will remain long term challenges for the widespread uptake in electric vehicles (EV). The technology which makes complete electric mobility possible and financially viable, from an Original Equipment Manufacturers (OEMs) perspective, already exists in the Indian scenario. Technology improvements in battery capacity, fast charging facilities and vehicle range are rapid and dynamic, with many OEMS and other companies in the EV value chain already investing significant amounts in research and development (R&D), and scaling manufacturing capacities. EVs have arrived globally and most certainly in India with companies like Mahindra REVA championing the EV four wheeler (4W) space and Hero Group dominating the EV two wheeler (2W) segment. The rising price of crude in the international market has become an energy security concern for the country. Are EVs the silver bullet to securing India's energy future and reducing carbon emissions of its transportation sector? This is a difficult question to explicitly answer. While on one hand, the mainstreaming of EVs will dramatically reduce India's reliance on imported crude oil, on the other hand, EVs, if disruptively introduced, will be charged by India's crumbling and inefficient electricity grid which is predominantly powered by imported coal. Therefore, whether EVs will strengthen India's energy and climate security is a catch 22 question, in case the status quo remains. The question then is - How do we change the status quo? For this, there is a need for a comprehensive policy roadmap towards private vehicle electrification wherein the financial sector and Government of India (GoI) play interdependent roles to develop critical and enabling EV infrastructure and incentivize OEMs and organisations along the value chain, to innovate and collectively work towards introducing EV 4W & 2W EV variants, thereby giving the consumer a choice. I firmly believe that the contents of this knowledge paper will provide important insights to policy makers in achieving a smooth and incremental transition to EV's, thus ensuring India's long term energy security. Thank You. Sincerely,

Rana Kapoor Founder, Managing Director & CEO

Preface The findings of this paper will be of particular interest to 3 key stakeholders: The financial sector, policy makers and the automobile industry. For the Financial Sector: The premise of this paper is that the financial sector will not fund companies that fall in a value chain whose risks and business models are not fully understood. Therefore the key objective of the paper is to clearly outline the EV value chain, the perceived risks along the value chain and highlight some financial tools and business solutions that could be modified specifically for de-risking and therefore facilitate the financing of EV growth in India. For the Indian Government and Policy Makers: Our key insight emanating from this report is that the Indian customer does not need to be directly incentivized by the Government of India (GoI) and State Governments to buy EVs, as is currently the case. The Indian consumer is price, fuel economy and style conscious and will therefore appreciate the long term savings of EV versus Internal Combustion Engine (ICE). In which case, growth of the EV value chain must be fuelled by organic consumer demand, and not pushed by unsustainable Government subsidies for consumers, to drive EV purchases. This would defeat the purpose of reducing strains on India's Balance of Payments. Organic consumer demand can only be fostered by the Government, working in collaboration with the private sector to invest in an economically enabling environment for rapid EV adoption, which entails the following: •

Develop 'Clean & Energy Efficient fast charging infrastructure' – Consumers will not buy EVs if they are unable to charge them whilst in urban transit. Range anxiety inhibits the consumer's decision making process and this is well documented by numerous reports. Therefore, the Government must invest in 'clean & energy efficient fast charging infrastructure' that will perceptually give urban consumers the comfort in buying EVs. Clean & Energy efficient fast charging infrastructure will comprise of, in a phased manner, smart grids and metering, renewable energy (RE) feeds and fast charging ports. Smart grids will not only accommodate EV charging point applications, but will also reduce energy wastage by the grid in general. EVs will not mainstream in India until and unless primary yet significant GoI led investments are made firstly in smart grid adoption, followed by plug in applications like RE feeds & fast charging ports. Direct GoI investments and public private partnership (PPP) models can be explored accordingly to hive off the financial investment component to the private sector.

•

Financially incentivise Indian Banks to fund India EV OEM manufacturers, Battery R&D, Fast charging R&D & Smart grid projects – Launch a Government sponsored fund, inviting applications from commercial banks, specifically for low interest forward lending, partial project risk guarantees and co-equity investments.

For Indian Automobile companies: PRUDENCE - Innovate and take incremental steps towards full automobile electrification. Competition in the Indian EV and hybrid market will transform the Indian consumer's perception in the years to come where foreign competitors and early bird Indian companies will grab dominant 4W EV & 2W EV market shares.

CONTENTS 1

Introduction: The Case for Sustainable Personal Transport in India 1.1 Energy Security 1.2 Climate Change 1.3 Road Transport Emissions in India 1.4 Trends in Personal Road Transport in India 1.5 Modal Shifts

1 3 5 6 7 9

Sustainable Personal Transportation 2.1 Technological Innovations in Low-Carbon Transport 2.2 Pathway to Zero-Emission Vehicles

13 14 20

The Electric Vehicle Value Chain 3.1 Raw Material Suppliers 3.2 Traditional Component Suppliers 3.3 Battery Manufactures & Suppliers 3.4 Original Equipment Manufacturers (OEMs) 3.5 Utilities 3.6 The Electric Vehicle Ecosystem

23 24 25 25 26 26 27

Policies Promoting Electric Vehicles in India 4.1 Initiatives by the Ministry of New and Renewable Energy 4.2 Initiatives in the 2011-2012 Budget 4.3 Initiatives by the Ministry of Heavy Industries and Public Enterprises 4.4 Government Agencies to take up EV Mobility in India

31 32 33 33 34

CONTENTS 5

Development of EV Charging Infrastructure in India

5.1

EV Charging Infrastructure: Past Efforts

5.2

Comparison with Compressed Natural Gas (CNG) Infrastructure

5.3

India's Power Sector

5.4

Smart Grids

5.5

Requirements for Smart Grid Deployment

Emerging Business Models

6.1

Direct Vehicle Sales

6.2

EV Leasing

6.3

Battery Leasing and Swap Schemes

6.4

Infrastructure Service Models

Analysis and Thought

7.1

Short Term Horizon

7.2

Long Term Horizon

7.3

Concluding Thoughts

Introduction: The Case for Sustainable Personal Transport in India

Introduction: The Case for Sustainable Personal Transport in India â&#x20AC;&#x153;The mobility model we have today will not work tomorrowâ&#x20AC;? - Bill Ford, great-grandson of Henry Ford and Executive Chairman of the Ford Motor Company

India's population is expected to surpass that of China's in 2030, making it the most populous county in the world. High economic growth rates and the impacts of globalization have concentrated prosperity in urban centers resulting in sprawl and auto-mobilization. Within 15 years the population residing in urban areas is expected to double to over 700 million [1] due to distressed rural to urban migration and other factors. This will place additional pressures on urban infrastructure, which is already overburdened. Projections indicate that by 2021 India will have the largest concentration of megacities in the world with a population exceeding 10 million. Out of a total of 88 cities, with a population of more than half a million in 2011, only 28 have any formal public transportation system. In most cases, the existing public transport systems are ageing and stretched beyond capacity, as the demand for public transport services outstrips supply, both qualitatively and quantitatively. As disposable income increases, a result of economic growth, those entering the middle-class are able to afford and prefer personal vehicles, as it is a symbol of upward social mobility, and also provides greater comfort, flexibility and convenience. In the absence of proper planning measures, the dynamics between increasing numbers of vehicles as well as a growing population wanting to use private vehicles for transport are likely to pressurize transport infrastructure, leading to inefficiencies as a result of infrastructural bottlenecks such as traffic congestion, gridlocks and slower train speeds. This would result in higher traffic management costs and greater energy consumption, therefore significantly increasing carbon emissions from transportation. The growth in motor vehicles is much faster than the population and faster than the GDP with 5% annual growth in motorcycles/scooter and 14% annual growth in cars [2].

Electric Vehicles in India: Challenges and Opportunities

If current ICE uptake trends continue, developing countries like India are faced with unsustainable futures that are likely to have negative triple bottom line impacts. Considering the stage of economic development in India, the country has a unique opportunity to develop sustainably by managing emissions growth, enhancing energy security and by supporting the creation of a world class clean-technology industry. The time is ripe to explore a range of potentially promising solutions to redirect the economy towards a path which is sustainable and secure.

1.1 Energy Security Beginning with economic liberalization in 1991, the consistent growth and globalization of the Indian economy thereafter, energy consumption in India has grown exponentially. Increasing urbanization, infrastructural development and concentration of economic activities in certain load centers have resulted in higher mobility fuelled by a rapid increase in number of vehicles and distances travelled. The growing demand for energy is being addressed largely though oil imports, where India is currently the 5th largest oil importer in the world. India simply does not possess adequate oil reserves to meet current and future demand. 72% of the oil consumed in India in 2007 was imported and this is projected to rise sharply to over 90% by 2030 [3]. High oil prices result in negative feedback loops that weaken stock prices and tighten fiscal conditions, thereby depressing economic growth in the long term. The growth of the Indian economy is impacted by the price of oil imports, which tends to be extremely volatile and sensitive to economic and political shifts. As a result of the global recession, oil prices rose to a record peak of INR 7,830 per barrel (USD 145) in July 2008 (Exhibit 1) and the Brent Crude oil price hit INR 5,400 per barrel (USD 100) on 31st January, 2011 due to the political upheaval in Egypt [4]. The growth in demand for oil from BRICS (Brazil, Russia, India, China & South Africa) nations and other emerging economies coupled with a decrease in the discovery of new exploitable oil fields will push up oil prices up over the next few decades. This would further exacerbate the budget deficit, dampening economic growth.

Exhibit 1: Oil price fluctuations (USD), 1987 â&#x20AC;&#x201C; 2011 [19] 140

Nominal Real (April 2011 US dollars) May 1987-April 2011 monthly average Brent spot prices

120

Conversion to April 2011 dollars uses US CPI for AII Urban Consumers (CPI-U)

100 80 60 40

Jan 2011

Jan 2010

Jan 2009

Jan 2008

Jan 2007

Jan 2006

Jan 2005

Jan 2003

Jan 2004

Jan 2002

Jan 2001

Jan 2000

Jan 1999

Jan 1998

Jan 1997

Jan 1996

Jan 1995

Jan 1994

Jan 1993

Jan 1992

Jan 1991

Jan 1990

Jan 1989

May 1987 Jan 1988

Source: IEA (International Energy Agency), (2009), Key World Statistics

Electric Vehicles in India: Challenges and Opportunities

The transport sector is a key consumer of oil and oil products. More than 50% of the oil consumption in India occurs on account of transport-related activities [85]. The World Energy Outlook has estimated that most of the increase in oil consumption by 2030 in India will be driven by light-duty vehicles, mainly passenger cars – growing at an annual rate of approximately 10% (Exhibit 2) [5].

Exhibit 2: Energy usage worldwide, industry break up and light duty vehicle depictions [19] PROJECTED INCREMENTAL OIL

TOTAL STOCK OF LIGHT-DUTY

DEMAND BY SECTOR, 2006-30 (MTI)

VEHICLES BY REGION (bn) 2.5 x3

600

2.0

400

1.5

Africa Latin America Middle East India Other Asia

200

China Eastern Europe EECCA OECD Pacific OECD Europe

1.0 0 0.5 -200

Transport

Industry Non-energy Other USE India Rest of world Other Asia China OECD

0 2000

OECD N. America

2010

2020

2030

2040

2050

Source: IEA (International Energy Agency), (2009), Key World Statistics

A significant question to ask at this juncture is whether the world can continue generating a sufficient supply of oil in the coming decades to accommodate the rise in demand from emerging economies like India and China, without hampering environmental quality? Until recently Governments and businesses have ignored the phenomenon of 'peak oil'. Peak oil refers to the 'point at which the maximum rate of global oil extraction is reached'. However, there has been growing acceptance of peak oil in the public domain, where both Governments and businesses have been exploring alternative sources of energy supply, primarily renewable sources like solar, wind, hydro, geo-thermal and nuclear energy. The oil industry is beginning to realize that we have crossed “the era of easy oil, (and) in the future oil will be dirtier, deeper and far more challenging (to extract)”[5]. Technologies that have the potential to phase-out oil dependent forms of transportation should be actively pursued to gauge their feasibility.

Electric Vehicles in India: Challenges and Opportunities

1.2 Climate Change Climate Change has emerged as one of the most pressing issues for Governments and policymakers. This issue has drawn unprecedented global collaboration between scientists and policy makers through the United Nations Framework Convention on Climate Change (UNFCCC) treaty that has been signed by 194 nations (as of May, 2011). According to the Fourth Assessment Report of the United Nations Intergovernmental Panel on Climate Change, 'warming of the planet is unequivocal' and it is very likely that the rise in global average temperatures is 'due to the observed increase in anthropogenic greenhouse gas (GhG) concentrations' [6]. The World Meteorological Organization (WMO) reported that 2010 was the hottest year on records since 1880, tied with 2005, and the difference was less than a margin of uncertainty [7]. This is evidence of a warming trend that continues to be strengthened (Exhibit 3). Consensus among the scientific community tells us that we must reduce greenhouse gases by 50% by 2050 to prevent the worst impacts of climate change [8].

Exhibit 3: Global temperature anomalies (째C) [6] Global Temperature Anomalies 0.6 0.4

0.2 0 -0.2 -0.4

-0.6 1880

1900

1920

1940

1960

1980

2000

Year Source: IPCC (Intergovernmental Panel on Climate Change), (2007), Summary for Policy Makers

Since the transportation sector is one of the largest and fastest growing sources of GhG emissions, decoupling growth in transport from increasing GhG emissions presents a clear challenge for policy makers in India. EVs, in particular, can have a significant impact towards cutting down demand for oil imports and reducing carbon emissions arising from road transportation, only if electricity is derived from hydro and renewable [9].

Electric Vehicles in India: Challenges and Opportunities

1.3 Road Transport Emissions in India India is the fourth largest GhG emitter in the world. The transport sector is the fourth largest contributor of greenhouse gases in India with a share of 7.5% of the emissions in the country preceded by electricity generation (37.8%), agriculture (17.6%) and industry (8.7%) [11]. India has witnessed a 200-fold increase in vehicle numbers between 1951 and 2011. Road transport is the largest contributor of GhG emissions and was responsible for 87% (123.5 Mt CO2e) of the total emissions arising from the transport sector in 2007. Currently passenger vehicles that include two wheelers and four wheelers are responsible for about 30% to 35% of the total road transport emissions (Exhibit 4).

Exhibit 4: Road Transport: CO2e emissions by Fuel type â&#x20AC;&#x201C; 2007 [12]

15% Buses/Cars/Taxi/3W (CNG+LPG) 2W/3W (Petrol) Cars/Taxi/Jeep (Petrol+Diesel)

55% 28%

Commercial Vehicles: Trucks/Buses/LCV (Diesel)

Source: Transport Sector: Greenhouse Gas Emissions 2007, Central Road Research Institute, New Delhi, INCCA

Over the next decade, the number of passenger vehicles on the road is expected to rise sharply, approximately 14% y-o-y. According to the IEA/SMP transportation model reference case (using 2003-04 as the base year), emissions from passenger cars are likely to grow at 5% per annum in India [13]. Even if engine efficiencies improve, the sheer growth in the number of vehicles on the road would lead to an absolute increase in GhG emissions from road transport.

Electric Vehicles in India: Challenges and Opportunities

Exhibit 5: Expected growth in CO2 emissions in India from different transport modes [13] 800 700 Water

Megatonnes C O2

600

Frieght rail Freight trucks

500

Air Pass rail

400

Buses 3-wheelers

300

2-wheelers Pass cars

200 100

20 50

5 20 4

20 40

5 20 3

20 30

20 25

20 20

20 15

20 10

5 20 0

20 0

Source: Mobility at What Cost?,InfoChange Agenda

1.4 Trends in Personal Road Transport in India The Indian road network is the second largest in the world, covering 3.34 million kilometers where as much as 80% of passenger traffic is carried by the roads [14]. The high growth rates of the Indian economy have resulted in an unprecedented rise in disposable incomes and this has contributed towards a burgeoning automotive industry. With the Indian economy projected to grow at an average of 8-9% per annum over the middle term, the percentage of Indian consumers that are able to afford vehicles is likely to increase. Yet, India's car per capita ratio (i.e. number of cars per 1000 persons) is the lowest among the world's five largest automobile markets (Exhibit 6), pegged at 18 cars per 1000 people. The share of public transport has been declining slowly as a result of the growth in private vehicle ownership, fuelled by expanding urbanization and affluence.

Electric Vehicles in India: Challenges and Opportunities

800 Germany

Italy

600

France

Spain 400

USA

200 India 0

Japan Russia Brazil China 40

140

Mn. Cars (2007)

Number of households ('000)

Cars per, 000 population (2007)

Exhibit 6: Cars per 1,000 population (country breakup) & socio economic strata growth in India [15] 41 -6% 65.2 3%

140.7

16%

46.7

109.2 13.8 2001-02

2009-10

High Income

Middle Income

(>Rs, 180K per month)

(INR 45K per month)

Low Income (<INR 45K per month) Source: The Indian Automotive Industry: Evolving Dynamics, KPMG India

Existing transport infrastructure has however, proven to be grossly inadequate to meet these demands. The reason for the same is reflected in a study conducted by the Ministry of Urban Development, Government of India and Wilbur Smith Associates [16]. The study estimated that total intra-city passenger transport activities (passenger kilometers) across 87 cities, including state capitals and cities with populations greater than 0.5 million (2008), was growing at a rate of about 5.5% per annum between 2007-11 as compared to a population growth rate of about 2.6% per annum in the same period of time. It is estimated that the increase in passenger activities would continue to grow at an even higher rate of about 7.6% per annum between 2011 and 2031. The dynamic interactions between personal vehicle penetration, rising incomes, increasing affordability of cars and expanding export opportunities is expected to position the Indian automobile industry for growth. The Indian automobile industry has recovered from the recession registering record sales in 2009-10 and it contributed almost 4% of India's Gross Domestic Product [15] and recent estimates suggest that the output of the industry is expected to reach 4 million units by 2013 [17] supported by infra structural developments and favorable Government policies. The automotive market remains cost-conscious in India. The primary decision point for car buyers in India continues to be the upfront purchase price of vehicles, whereas fuel efficiency has historically been a secondary concern, though the implied effect is evident due to a preference for small and cheap cars. Having stated that, the luxury car market in India has shown compounded annual growth rate of 30-40% over the last 4 years [18]. This statistic challenges the notion that the Indian consumer will remain predominantly price conscious in the long term. However, as fuel costs rise, we can expect increasing consumer importance and emphasis on fuel efficiency in purchase decisions. 8

Electric Vehicles in India: Challenges and Opportunities

1.5 Modal Shifts The rapid growth of demand for passenger mobility in Indian cities has not been matched by an equal increase in supply of transport infrastructure and services. This has resulted in the increased use of private vehicles across most urban centres accompanied by declining share of public transport systems. In addition, with expanding cities, the share of pedestrians, cyclists and nonmotorized transport users has also fallen, as seen in Exhibit 7, 8 and 9.

Exhibit 7: Growth in passenger vehicles in India (mn) from 1981 to 2009

Exhibit 8: Change in public transport shares between 1994 to 2007 [16]

Growth of registered motor vehicles in India 90 80 70 60 50 40 30 20 10 0

Share of public transport in India 80

PT share (%)

Two-wheelers Cars, jeeps, taxis Buses

1994

70 60 50 40 30 20 10 0 <0.5

1981

1991

2001

2007

0.5 to 1 1 to 2 2 to 4 4 to 8

City population size (in million)

2009

Source: WSA (Wilbur Smith Associates) & MoUD (Ministry of Urban Development), (2008), Study on Traffic & Transportation Policies and Strategies in Urban Areas in India, as cited in TERI, (2012)

Source: MoRTH Yearbooks

Exhibit 9: Changing shares of walk trips between 1994 and 2007 [16] 60

% Share of walktrips

1994

2007

0 <.5

.5-1

1-2

2-4

4-8

Above 8

City population size (in mn) Source: WSA (Wilbur Smith Associates) & MoUD (Ministry of Urban Development), (2008), Study on Traffic & Transportation Policies and Strategies in Urban Areas in India, as cited in TERI, (2012)

In India, the transportation sector is responsible for nearly 20% of the total energy consumption and is the second largest consumer of energy in the country after industry [19]. A significant amount of road based passenger transport activities in the country are concentrated in cities. The on-road passenger transport activities in urban India are responsible for nearly 40% of the total energy consumption in road passenger transport sector [20].

Electric Vehicles in India: Challenges and Opportunities

The current trends in urban transport, which are primarily a result of the inability of Indian cities to meet the increasing transport demand in a planned manner, have resulted in local problems related to congestion, deterioration of air quality, increase in number of road fatalities and accidents and loss in economic productivity. The congestion levels in many Indian cities have reached unmanageable proportions, the average vehicle speeds dropping down to as low as 10 km/hour in many cities. This leads to higher fuel consumption due to low speeds and vehicle idling [21]. Considering an oil constrained future and the high emission levels associated with the transport sector, it is therefore important to reduce the use of petroleum dependent private vehicles in the country. In the 1950's and early 1960's, private vehicles were less in number and road transport served as a mode complimentary to public transportation. By the late 1990's the share of road transport in cities was as much as 80% in passenger traffic [21]. The modal split has shifted in favor of road transport, away from energy efficient modes like railways and buses that have a lower carbon footprint. For example, in Delhi the modal share of public transport has dropped from 60% in 2000 to 43% in 2008 [22]. This is a likely trend not only in most megacities but also Tier II and Tier III cities that are characterized by poor transport services and infrastructure. Only 20 cities in the country have an organized public bus service [23], which in most cases are inadequate leading to an increased dependence on personal modes of transport.

Exhibit 10: Comparison of Vehicular Growth with Population Growth 140000 120000 100000 80000 60000 40000 20000 0 2001 Population**

2002

102874 102761

2003

2004

2005

2006

2007

2008

2009

104353 106002 108900 110600 112200 113800 115400

Public Buses*

114.9

114.6

115.2

115.7

113.2

112.1

107.8

113.6

117.6

Cars/Taxis/Jeeps*

7058

7613

8599

9451

10320

11526

12649

13950

15313

2W*

38556

41581

47525

51922

58799

64743

69129

75336

82402

PCI

40678

42375

45337

49004

54505

60951

70238

78790

88420

Source: Indiastats.com

10 Electric Vehicles in India: Challenges and Opportunities

The growth in personal vehicle ownership will continue to accelerate with increasing incomes, greater availability, as well as access to credit and decreasing vehicle cost, case in point being the Tata Nano which has enjoyed an increase in sales, 5.8%, over 2011-2012 [24]. Exhibit 10 indicates a growing reliance on personal modes of transport (cars and two-wheelers) and intermediate modes of transport (taxis and auto-rickshaws) driven by the doubling of percapita incomes from 2001 to 2009. Over the same period the number of public buses has remained relatively constant considering a rise in population of approximately 125 million. This data suggests a growing trend towards a reliance on personal modes of transport due to the burgeoning middle class, a lack of urban planning and minimal investments by the Government towards improving public transportation. Bus services in particular have deteriorated because public transport service providers are unable to expand services, both in terms of number of buses and number of routes plying. The share of buses is negligible when compared to private/personalized vehicles in most Indian cities. Overcrowding of the public transportation system is particularly evident in large cities, where buses and trains carry more than twice their optimal capacity. As a result we have seen a massive shift towards personalized transport, particularly two-wheelers, and the growing use of intermediate modes such as taxis and three-wheeler auto-rickshaws [25]. At this juncture, it should be noted that the Government has drawn plans to improve local rail networks in urban cities by improving access and expanding existing capacity. Other urban transport planning initiatives include bus-rapid-transport-systems (BRTS), pedestrian zones, skywalks and cycling paths. Delhi, Mumbai, Kolkata, Chennai and Hyderabad are in different phases of planning or implementing light-duty metro rail services to complement existing modes of public transport. It is envisaged that these plans will have some impact on increasing the share of public transport. However given India's low motorization index and the lack of adequate investments in public transport, the country is further expected to exhibit growth in light duty personal vehicles. India will be faced with the complex problem of convincing people not to use their vehicles because this would increase the demand for oil imports - adding to the budget deficit while contributing to the country's growing carbon footprint. Therefore, the only way to really shift population mindsets is by making public transportation networks extensive, accessible and safer. In the interim, alternative modes of sustainable personal transportation must be explored to tackle the immediate socio-environmental impacts of the Internal Combustion Engine.

Electric Vehicles in India: Challenges and Opportunities 11

Sustainable Personal Transportation

Sustainable Personal Transportation Sustainable transport systems aim to reduce emissions, fossil fuel consumption and minimize the land area requirements, while providing easy access to people to enable efficient mobility [25]. Vehicles that run on alternative sources of energy such as solar, bio-fuels, fuel cells and batteries have been developed, demonstrated and in some cases they have entered markets and are already on the roads.

2.1 Technological Innovations in Low-Carbon Transport A brief overview of key innovations in low-carbon vehicles that are being actively pursued in India: 1. Electric Vehicles (EV) EV's utilize electric motors to induce propulsion. The key differentiator between EV's and conventional ICE vehicles is that the electricity that they consume can be derived from different sources or a combination of energy sources, particularly renewables such as solar and wind energy. Electric vehicles are only as 'green' as the energy sources used to charge them. Charging EV's in India remains a challenge, where 60% of electricity is generated from fossil fuels fired coal power plants [26]. Electricity can be transmitted to EV's wirelessly through induction or directly using an electrical cable. EV's utilize on-board batteries to store electricity. Unlike ICE's, EV's are capable of regenerative braking whereby they are able to recover the energy that is lost during braking as electricity that is then stored back into the on-board battery. They do not have any tail-pipe or evaporative emissions and are virtually maintenance free. There has been a renewed

14 Electric Vehicles in India: Challenges and Opportunities

interest in EVs as a solution to address the emerging concerns around energy security and climate change. There are almost 40 new production ready electric vehicles and hybrid vehicles launching by 2013. 2. Bio-fuels Bio-fuels are broadly defined as “fuels that are produced directly or indirectly from organic material – biomass – including plant materials and animal waste” [27]. Efficiency improvements in conversion technology now permit the extraction of bio-fuels from a wide variety of sources, particularly, wood, crops and waste materials. Bioethanol and biodiesel are the two most commonly available types of biofuels. Biofuels have been around since the invention of the automobile but were largely displaced by the discovery of huge deposits of oil that kept petrol and diesel prices cheap for decades. Bio-fuels are a renewable resource as more plants can be grown for conversion into fuel, with the added advantage that the plants sequester carbon as they grow. Over the last decade there has been much debate about the relative pros and cons of focusing on biofuels as a viable solution based on a range of economic, social, environmental and technical issues. The large scale production of bio-fuel for transportation would require large land areas; as a result its potential to replace fossil fuels is limited. However, innovative approaches like using seaweed to produce biofuels might address the 'food vs. fuel' debate and lead to breakthroughs. The current world production of biofuels is less than 1% of world transport fuel demand and India contributed about 0.6% of global biofuels production in 2009 [28]. In India, bio-fuels have an assured market as the Government, through the 'National Biofuel Policy', aims to meet 20% of diesel with fuel derived from plants. In 2009, the Government of India mandated 5% blending of ethanol with petrol across India, which is projected to annually save 80 million liters of petrol [29]. 3. Compressed Natural Gas (CNG) Vehicles are increasingly using compressed natural gas (CNG), or less commonly liquefied natural gas (LNG), as an alternative to conventional fuels as it is cheaper and cleaner. In 2010, there were ~12.6 million CNG/LNG vehicles plying the roads worldwide with India ranked 5th, with a total fleet of approximately 1.08 million vehicles [30]. Existing petrol or diesel vehicles can be easily modified to run on CNG at an average cost of INR 20,000 [31] for petrol vehicles and about INR 50,000 for diesel vehicles. CNG is one of the more promising alternative fuels due to its abundance and zero emissions. The strongest driver of CNG development has been its favorable economics i.e. the price advantage of CNG over conventional fuels. CNG as a transport fuel has been actively promoted by the Government of India through mandates and targets. The CNG programs in Delhi and Mumbai are the oldest and well matured, driven by public policy mandates and a strong commercial interest of large taxi fleets in fuel/cost savings. The Ministry of Environment and Forests recently stated that approximately 70% of intra-

Electric Vehicles in India: Challenges and Opportunities 15

city public buses use CNG as fuel [32]. Rising petrol and diesel prices have stimulated demand for CNG vehicles and many auto majors like Maruti-Suzuki, Tata Motors, Chevrolet, Toyota, Hyundai, among others, have introduced factory fitted CNG vehicles of their popular models in the Indian market. 4. Hydrogen Fuel Vehicles (HFV) Hydrogen vehicles internally convert the chemical energy from hydrogen to mechanical energy for propulsion either through burning hydrogen in an internal combustion engine or through reactions between hydrogen and oxygen in fuel cells that run electric motors. Hydrogen vehicles are divided by two different technological approaches, namely i.

Hydrogen-ICE: Existing cars that run on petrol and diesel can be modified to use hydrogen as a fuel in their internal engines.

ii.

Hydrogen Fuel Cell: Hydrogen fuel cell cars are essentially electric vehicles that use hydrogen fuel cells instead of battery packs for power.

Hydrogen has proved to be an attractive fuel as it has excellent electro-chemical reactivity, adequate power density to enable automobile propulsion and zero tail-pipe emissions [33]. Hydrogen can be produced using a wide variety of sources such as natural gas, coal, biomass, geothermal, solar and wind, which makes it an important energy carrier from an energy-security stand point. Most automobile majors have invested in developing prototypes and are at various stages of testing commercial feasibility of HFV. Though HFVs are considered to be zero emission vehicles, they do have 'well to wheel' (total lifecycle) emissions, as most of the hydrogen used is produced from natural gas. Though HFCV's tend to outperform battery electric vehicles in terms of range and refueling time, they yet face significant technical and economic hurdles that critics, like Nobel laureates Steven Chu and Burt Richter, say would not be overcome in the near future [34]. Most research tends to support a hydrogen economy as a long term option as the hydrogen option suffers from several uncertainties around system and infrastructure costs and is not likely to be available en-mass in the foreseeable future, i.e. before 2020. In India, the Planning Commission has constituted working groups to look at hydrogen as a viable fuel. The Ministry of Petroleum and Natural Gas created a INR 100 cr. (USD 18.5mn) fund for research and development of hydrogen technologies. Other efforts include - The Green Initiative for Future Transport (GIFT), which aims to research, develop and demonstrate hydrogen fuel cell vehicles, with goals and targets up to 2020. India is also one for the 16 founding members of the International Partnership on Hydrogen Economy set up in Washington D.C., on November 2003 and has also prepared a National Hydrogen Energy Road Map and Programme (2006) focusing on two and three-wheelers [35]. Few Indian vehicles manufactures like Mahindra and Tata Motors, in

16 Electric Vehicles in India: Challenges and Opportunities

partnership with research institutes have developed prototypes of hydrogen vehicles to test their feasibility in the Indian market. 5. Hybrid/Dual Fuel Vehicles (HFV) Hybrid/Dual Fuel Vehicles are defined as vehicles that use two or more distinct fuel sources, or a mixture of fuels, for power and propulsion. HFVs are viewed as a transition technology to bridge the gap towards zero-emission vehicles because they provide consumers with flexibility in terms of fuel costs, refueling time, driving distances and emission reductions [37]. They tend to be cleaner and are more fuel-efficient than conventional vehicles that use an ICE, the extent of which depends on the combination of fuel sources used. Many different combinations of fuel sources have been developed and tested for vehicles. Hybrid vehicles typically ensure savings in terms of fuel economy and emissions due to the following: i.

Relying on both engines and electric motors for their power needs, as this reduces the size and weight of engines resulting in less internal losses.

ii.

The tank-to-wheel efficiency of electric motors is also significantly higher than ICEs.

iii.

Batteries have the capacity to efficiently store, reuse and recapture energy, through technologies like regenerative breaking that save energy normally wasted as heat during braking.

iv.

Vehicles use blended fuels, like ethanol added to petrol or hydrogen mixed with CNG, as the addition of low emission fuels to conventional fuels reduces the total fuel emission factor.

Exhibit 11: Various fuel combinations being pursued through Government initiatives and by automobile manufactures Hybrid and Dual Fuel Vehicles

Blended Fuels

Dual Fuels

Liquid

Gaseous

Biofuel +Gasoline

Hydrogen +CNG (Hy-thane)

CNG + Gasoline

Electric + Gasoline

Source: YES BANK Analysis

Electric Vehicles in India: Challenges and Opportunities 17

The Government of India, in partnership with automobile manufacturers and research institutes, has been exploring the feasibility of blended fuels and dual fuel vehicles. The future will most likely see a combination of solutions being used for different purposes based on their relative suitability. For example, while dual fuel vehicles might be promoted in densely populated urban environment that have the required recharging/refueling infrastructure, vehicles running on a mix of gasoline and ethanol might be suited to inter-city mobility or long distance journeys where recharging infrastructure for electric vehicles or CNG refueling facilities are absent. The Ministry of New and Renewable Energy, along with SIAM, IOCL, Tata Motors, Ashok Leyland, Eicher Motors, Mahindra and Mahindra and Bajaj Auto, have supported a unique project for demonstrating a hybrid Hythane (H-CNG) model, using up to 30% of hydrogen and CNG, in cars, buses and three-wheelers[35]. 6. Advanced Internal Combustion Engine (AICE) Vehicles that utilize new technologies to improve the overall engine efficiency and reduce emissions of internal combustion engine vehicles are collectively called Advanced Internal Combustion Engine (AICE) vehicles. Automobile manufacturers constantly strive to improve the efficiency of ICE vehicles to reduce energy loss, improve mileage, reduce tail-pipe emissions and ultimately lower the cost of operation. The Government of India has also driven engine efficiency improvements by imposing the Bharat Stage (BS) emissions standards, which are progressively updated. They stipulate emissions limits for different vehicles categories. Automobile manufacturers must meet the stipulated criteria as they are mandatory. In cost-conscious markets like India, a key decision point for consumers is the total cost of ownership of vehicles â&#x20AC;&#x201C; which includes the price of the vehicles, the cost of fuel, and maintenance costs. Cars that have a higher efficiency require comparatively less fuel to travel a particular distance. As a result their fuel consumption and running costs are less. However, it is important to consider the 'rebound effect', formally referred to as the Khazzoom-Brookes postulate [37], that has been confirmed by a wide range of studies and indicates that when energy prices are constant, cost effective efficiency improvements will increase economy-wide energy consumption above what it would have been without those improvements or in simpler terms â&#x20AC;&#x153;greater the efficiency of a process, the greater the energy useâ&#x20AC;? [5]. The Kazzoom-Brookes postulate clearly suggests that energy efficiency improvements in the automobile sector would not suffice to meet future transportation goals (i.e. de-carbonization of the transport sector), as they would invariably lead to an absolute increase in energy/fuel consumption and thus carbon emissions [37]. Advanced ICE's are not an end solution but they will play an important role as an intermediate wedge until other low-carbon alternatives like EVs and HFV's achieve scale and market penetration.

18 Electric Vehicles in India: Challenges and Opportunities

Exhibit 12: Fuel type impact analysis Comparison of Alternative Transport Technologies in India Petrol Main fuel source

Crude oil

Diesel

Bio-Diesel

Ethanol

CNG

Electric

Hydrogen/ Hythane

Crude oil

Soy bean oil, rapeseed oil, waste cooking oil, animal fats

Corn, grains or Underground agricultural reserves waste (sugarcane molasses)

Coal; however there are a range of sources that include nuclear, natural gas, hydroelectric and renewables.

Natural gas, methanol, other energy sources including renewables

Liquid

Compressed gas

Electricity

Compressed gas

All types of vehicles categories

Most types of vehicle categories.

Any vehicle that runs on diesel -no modifications for up to 5% blends and many engines are compatible with 20% blends.

Light duty vehicles, medium and heavy duty trucks and buses. Other vehicles that can use mixed fuels.

Many types of vehicle categories but most require modifications to engines and space for storage tanks.

Neighborhood electric vehicles, bicycles, motorbikes, light-duty vehicles, medium and heavy duty trucks and buses.

No vehicles available for commercial sale; several pilot projects are currently being demonstrated.

Available at all fueling stations

Not available at fuelling stations. Plans to introduce biodiesel through the 'National Biofuels Policy'. It is now being produced locally for use in threewheeler rickshaws.

Currently blended with diesel or petrol. 5% ethanol blended petrol has been introduced in 20 states and 8 union territories, and will be extended to 10%blend panIndia in phase2.

Available in most large cities and widely across Maharashtra, Gujarat and Delhi.

Charging facilities not available at any fueling stations. Most homes, Government facilities, garages and businesses have adequate electricity capacity for charging (may require slight upgrades)

Not available at fueling stations. A demo station has been set up at Dwarka in Delhi to test the technology

Refueling Refueling Infrastructure stations are widely spread across the country. Mature infrastructure for the deliver of petrol.

Refueling stations are widely spread across the country. Mature infrastructure for delivery of diesel.

Existing fuelling stations can be fitted with biodiesel pumps

Ethanol fuel dispensers can be easily installed at conventional fueling stations

Expansion of gas pipelines will lead to greater availability of CNG

Need for public charging stations at parking lots, malls, fuelling stations and also in buildings

Delivery of hydrogen will require significant investment towards production and infrastructure. Hythane can make use of existing CNG infrastructure.

Physical state Liquid

Types of Vehicles Available

Fuel Availability

Electric Vehicles in India: Challenges and Opportunities 19

Petrol

Diesel

Bio-Diesel

Ethanol

CNG

Electric

Hydrogen/ Hythane

Require regular pollution checks, servicing, tune-ups, oil changes, lubrication

Hoses and seal may be affected with higher-percent blends. Lubricity is improved over that of conventional diesel

Special lubricants may be required. Practices are similar to conventional vehicles

High pressure tanks require periodic inspection and certification

Minimal servicing needed. No tune-ups, oil changes, timing belts, water pumps, radiators or fuel injectors. Batteries need to be replaced after 3-6 years

In fuel cell applications maintenance in minimal. HydrogenICE's would require regular servicing.

INR 71/liter

INR 42/liter

INR 27/liter

INR 32/kg

INR 4/kWh

Environment Impacts

Produces harmful emissions. Gasoline vehicles are improving and as a result emissions are being progressively reduced.

Produces harmful emissions and particulate matter. Emissions are being reduced with aftertreatment devices.

Reduces emissions and particulate matter when compared to conventional diesel. However NOx emissions may increase.

Can demonstrate up to 25% reduction in ozone-forming emissions when compared to petrol.

Significant reduction in tail pipe and ozone forming emissions though HC emissions may increase.

Zero tail-pipe emissions. Some emissions can be attributed to power source/ generation.

Zero regulated emission for fuel cell vehicles and only NOx emissions possible with Hydrogen ICE vehicles.

Energy Security Impacts

Manufactured using mostly imported oil which is not a secure option

Bio-diesel is domestically produced and has a fossil energy ratio of 3.3 to 1 which means that its impacts are slightly less but similar to petrol

Ethanol is domestically produced and is renewable.

CNG is domestically produced but is limited. India is currently exploring options of importing natural gas from Iran and Myanmar.

Electricity is generated through coal fired power plants as it is available in plenty. It is the most economical and price stable fuel.

Hydrogen can help reduce India's dependence on foreign oil by being produced from renewable resources

Maintenance

Fuel Costs (as on Sept 2012)

(Source: YES BANK research, SIAM, Ministry of Petrolium, US Department of Energy â&#x20AC;&#x201C;Alternate Fuels and Advanced Vehicle Data Center)

2.2 Pathway to Zero-Emission Vehicles The path towards Zero-Emission Vehicles (ZEVs) begins with technological modifications and enhancements to existing engines and drive-trains that improve the tank-to-wheel efficiency of vehicles. Vehicles that run on low-carbon alternative fuels such as biodiesel, ethanol, synthfuels and natural gas are categorized collectively with high efficiency ICEs as A-ICE vehicles, and they can reduce emissions by up to 10-15% [39].

20 Electric Vehicles in India: Challenges and Opportunities

Exhibit 13: The path to electrification Electrification

Technological Advancement

Hydrogen

Fully Electric Hybrid Fuel + Electric Natural Gas and Biofuels Advanced Internal Combustion

Up to 15%

10- 30%

30-40%

50 -100 %

Carbon Reduction Potential Source: YES BANK Analysis

The next step towards ZEVs involves the electrification of vehicles. There are a wide range of EV technologies being explored at the moment, that include: ü Mild-Hybrid – It is the first real step towards electrification and ZEVs, and contains a small electric motor that enables a start-stop system, facilitates regenerative braking energy to charge the battery and offers acceleration assistance. Mild-hybrid vehicles achieve small reductions in emissions, between 10 to 15% at relatively high costs [39]. It is viewed as an intermediate development step towards a fully-hybrid system. ü Fully-Hybrid – Features a larger motor and battery pack that provides the vehicle with electric launching, acceleration assistance and electric driving at low speeds. It can achieve a maximum of 25-30% in GhG emission reductions. Though fully-hybrids currently cost between INR 2.5 to 3.5 lacs (USD 4629 – USD 6481) more than conventional ICE cars, the cost of hybrid components is expected to fall by 5% per year [39]. ü Plug-in Hybrid (PHEV) – It is a hybrid vehicle with a larger battery that can be recharged by connecting a plug to an electric power source or grid. The ability to connect to the grid gives the PHEV an range of 30-60 kilometers of all electric driving. PHEVs feature smaller ICE that takes over from the all electric drive to provide a longer range. The carbon reduction potential of a PHEV is between 30-40%.

Electric Vehicles in India: Challenges and Opportunities 21

ü Range Extenders – They are all EVs that feature a small ICE that is used to recharge the battery to extend the driving range. This feature is useful in the absence of charging infrastructure as they combine the advantages of electric driving with the ability to undertake longer journeys. They have a carbon reduction potential of between 60-80% depending on the electricity source used to charge the battery [39]. ü Fully Electric – All of the needed propulsion energy is stored in a large battery that can be recharged by connecting it to the electricity grid. Electric vehicles are two to three times more efficient than conventional ICEs [40]. Though there are a range of different battery technologies being used, it is predicted that litium-ion batteries will dominate the landscape [40]. A fully electric vehicle is only as clean as the source of electricity that is used to recharge the battery, and when charged using renewable sources it can reduce emissions by up to 80-100%.

Exhibit 14: GhG emissions from various fuel sources [42] Greenhouse Gas Pollution (Light duty vehicles only) (Billion/tonnes CO2-equivalent/year) 2.5

Base Case: Gasoline Hybrid Scenario

2.0

Gasoline Plug-In Hybrid Scenario

1.5

1.0

0.5

100% Gasoline ICVs

1990 LDV GHC

GhG Goal: 60% below 1990 Pollution

GhG Goal: 80% below 1990 Pollution

2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 Source: Zhang & Cooke, 2010

22 Electric Vehicles in India: Challenges and Opportunities

Ethanol Plug-In Hybrid Scenario BEV Scenario H2 ICE HEV Scenario Fuel Cell Vehicle Scenario

The Electric Vehicle Value Chain

The Electric Vehicle Value Chain The stimulus for a technological shift towards electric vehicles in India, as is the case among most comparable markets, depends on improved battery technologies, longer ranges, better charging infrastructure, lower prices, Government incentives and progressive regulation. While electric vehicles offer a great opportunity to diversify across the value chain, they also pose significant risks as the technology could change the dynamics of the industry and cede large parts of the value chain that has evolved over several decades obsolete [43]. In order to grasp the changing landscape of the EV sector it is important to understand the different actors across its value chain and the relationships they share â&#x20AC;&#x201C;

Exhibit 15: The EV value chain Raw Material Suppliers

Traditional Component Suppliers

Battery Suppliers

OEMS

Utilities / Infrastructure

Source:YES BANK Analysis

3.1 Raw Material Suppliers Raw materials have a high impact on cost structures of the automobile sector. Raw material suppliers face a host of challenges that include rising prices, fluctuating prices, discriminatory pricing by foreign vendors of Indian component manufacturers/exporters and custom free import of finished goods from ASEAN countries under various free trade agreements [44]. Steel is one

24 Electric Vehicles in India: Challenges and Opportunities

of the primary raw materials used in the manufacture of automobiles and its price has risen between 25% to 40% for specific products like flat, long and pig iron which are commonly used by vehicle manufacturers. Ironically, even though India is one of the cheapest sources of iron ore, steel prices are high when compared to international standards. The Government of India must consider enforcing competitive policies that contain the price of steel against global steel prices by regulating the export of steel, monitoring steel price and lowering import duty to widen access to cheap steel sources outside India (IDC, 2008) [45]. Other raw materials like plastics and lithium (for batteries), a rare earth metal, are also plagued by global price fluctuations. Given the growth in demand for lithium batteries, that are used in common electronics and appliances like mobile phones and laptops, the price of lithium is expected to rise as lithium reserves are scare and geographically sparse. This is of particular concern to Indian battery manufacturers, considering China is the closest source of lithium, having the largest proven lithium reserves in the world. Also, the battery component has the highest weightage in the overall cost structure of an EV.

3.2 Traditional Component Suppliers The auto component industry in India is expected to grow at a rate of 13-15%, having the potential to become one of the top five auto component economies by 2025 [45]. Over the last decade there has been a marked improvement in the quality of auto components manufactured in India. Most of the standard components required by the Indian automotive sector are domestically manufactured with an import dependance estimate of about 13.5% of domestic demand. Due to growing economies of scale of the Indian auto component industry, manufacturers of EV are likely to depend on traditional component manufacturers for all standardized parts that go into an EV and that are common to ICE vehicles such as tyres, seats, doors, windows etc. India exports a wide range of auto components and chassis. The auto component industry's exports are expected to grow by about 24% during 2010-2015 [46], and can be further bolstered by investing in technology collaborations and joint R&D. Traditional component manufacturers can diversify their product offerings by tying up with makers of EVs, leveraging their technological expertise, to develop specialized parts for hybrid and EV, both for domestic and export markets. India has a relatively strong auto component base for electrical and electronic components that can be leveraged to tap into the emerging EV sector.

3.3 Battery Manufacturers & Suppliers A key concern in the EV sector has been the advancement of battery technology, which has benefitted from recent breakthroughs in lithium-Ion batteries due to their application in computers and mobile devices. There has been substantial growth in the number of lithium-ion patents in China, USA, Japan and Western Europe [40] and batteries available today can store energy to enable driving ranges that exceed 100 kms. Battery manufacturers have been working with OEM's to develop batteries for EVs and many of them have been increasing production capacity to achieve the required volume to drive down prices. The growth in the battery market for EVs will spur investments in R&D making batteries more reliable and affordable while providing longer driving ranges. It is likely that existing battery suppliers for mobile devices will dominate the

Electric Vehicles in India: Challenges and Opportunities 25

market, though new players are quickly emerging. Battery manufacturers and suppliers will also have to consider pro-environmental means to dispose depleted batteries as they comprise hazardous chemicals. While some battery suppliers are forging new partnerships with automobile manufacturers to reduce risks (e.g. Toyota and Panasonic), others continue to traditionally buy batteries from Tier 1 suppliers (e.g. Johnson Control and Saft)

3.4 Original Equipment Manufacturers (OEMs) Looking ahead, OEM's face daunting challenges towards the allocation of investments in new technologies as a result of the current financial slowdown, and yet they must adapt their businesses to capitalize on emerging opportunities in new markets, specifically the EV sector. The automobile industry seems to be preparing for a major shift towards powertrain technology. There are a range of different types of EVs (see 'Pathway to ZEVs) and OEM's will have to assess options based on their ability to leverage different actors across the value chain. Since established OEM's have plants that are built around mass production, they offer very few cost advantages for new powertrain configurations. OEM's could develop a competitive advantage through partnerships with technology companies (that have know-how on electric drive-trains), battery manufactures and traditional component suppliers to reduce risks and leapfrog the development of EVs. In turn, they could also partner with other OEM's to share and spread associated risk, by standardizing EV components. Manufacturers in emerging economies, India and China in particular, are exposed to much wider business opportunities from the shift towards EVs.

3.5 Utilities â&#x20AC;&#x153;Indian cities and towns are plagued by frequent outages and the basic requirement for electric cars is electricityâ&#x20AC;Śâ&#x20AC;? [47]. A growth in demand for EVs will have a sizable impact on electricity generators and suppliers. This additional demand for electricity will have to be addressed through increased generating capacity and essentially through better grid management. Driven by reforms beginning with 'The Electricity Act, 2003', followed by de-licensing, the power generation sector has transformed from being a slow moving industry to a space where there lie vast growth opportunities. By repairing or upgrading distribution equipment, efforts are being made to reduce transmission and distribution losses, which currently stands at 28%. Covered in a later section, we will explore the possibility of introducing smart grids in major metropolitan cities, from a technical perspective. India's power sector has increased generation capacity by record numbers this year, and it is expected to double from the current 177 gigawatts (2011) to 300 gigawatts by 2015 [48]. India also has plans to generate 15% of the electricity mix through renewable sources such as solar, wind, biomass, geothermal and hydro energy [49]. Solar energy is expected to grow to the tune of 2 GW by 2013, gradually scaling up to 20 GW by 2020 [50], and wind energy generation capacity which has experienced phenomenal growth, stands at 13 GW (Dec, 2010) and is expected to grow to about 50 GW by 2020 [49]. According to a number of studies, electricity demand from EVs can 'increase the penetration of wind as a baseload resource' [51], since the generating profile of wind energy matches the load profile of a night-time charging regime. Increasing the renewable energy mix would reduce the emission factor of the total electricity

26 Electric Vehicles in India: Challenges and Opportunities

generation mix, rendering EV's cleaner and greener. Since EVs are only as clean as the electricity used to charge them, adding renewable energy to the mix would only boost their green credentials. EV manufacturers must liaise with utility providers in order to develop innovative solutions for charging of public and private, including option of using renewable energy sources.

3.6 The Electric Vehicle Ecosystem Exhibit 16: The EV Ecosystem Insurance

Tech R&D

Finance Smart Grid

Grid Storage

Firming Renewables

Climate Change

Data Flow

Policy

Renewable Power

Building/Vehicle Interaction (V2B) Information

Li-ion Battery Money

V2G

Consumers Vehicle Electrification

Key system players

Electricity

Smart Charging

Major trends

Source: Mahindra - Reva

Electric Vehicles in India: Challenges and Opportunities 27

Exhibit 17: EV risks, challenges & solutions

28 Electric Vehicles in India: Challenges and Opportunities

Electric Vehicles in India: Challenges and Opportunities 29

Safety

safety

Source: YES BANK Analysis

30 Electric Vehicles in India: Challenges and Opportunities

chassis

Policies Promoting Electric Vehicles in India

Policies Promoting Electric Vehicles in India Exhibit 18: Green Transport in India India’s first CNG bus launched Supreme Court orders to convert all city bus fleets, taxis and auto-rickshaws in Delhi to CNG

1998

First section of the Delhi Metro Rail–the red line-opened Reva exported to European markets and branded as G-wiz

First electric car commercialized in India (Reva)

2000

CNG conversion of buses, taxis and auto-rickshaws introduced in Mumbai

2001

2002

2003

All buses in Delhi converted to CNG

2004

India’s first dual fuel (petrol + LNG) passenger car – ’Wagon R Duo’ launched by Maruti-Suzuki

2005

India’s first MUV-‘Omni Cargo’ launched by Maruti-Suzuki

2006

1,10,000 electric vehicles sold 97-98% of which were two wheelers

Hero Electric launches electric two wheeler

2007

India’s first electric two wheeler launched –‘Yo Byke’ by Indus Elec-trans

2008

2009

First hybrid car launched in India-Honda Civic Hybrid

Karnataka is the first state to utilize bio-fuels and ethanol-blended fuels in public buses in Bangalore

Source: KPMG, YES BANK Analysis

The Government of India, along with several State Governments, have supported many initiatives promoting environmentally friendly technologies. Over the last few years several steps have been taken in this direction by using regulation as the primary driver. The following section highlights some of the major initiatives that have been taken by the Government to support the cause of electric mobility in India. 4.1 Initiatives by the Ministry of New and Renewable Energy (MNRE) The Ministry of New and Renewable Energy (MNRE) in November 2010 decided to offer incentives to EV manufacturers during the remaining period of

32 Electric Vehicles in India: Challenges and Opportunities

GOI sets up the National Mission for Hybrid and Electric Vehicles

2010

2011

Full exemption from central excise duty provided to EVs Delhi is the first city in India to introduce a hybrid electricCNG public bus manufactured by Tata Motors

2010-2011 and for the entire period of 2011-2012 to boost the sales of environment-friendly vehicles. The scheme, which came under the 11th five year plan, set aside a fund of INR 95 cr. (USD 17.6 mn) to provide incentives of up to 20% on ex-factory prices of vehicles, subject to a maximum limit. The manufacturer gave this subsidy to the customers and later claim it as a refund from the Government. Targets were set up for sales in 2010-2011 with MNRE giving subsidies to 140 EVs, 10,000 electric high-speed 2Ws, 20,000 electric low-speed 2Ws and 100 electric three-wheelers [53]. In order to avail this scheme, the Government set out qualification criterions for manufactures. Firstly, they had to have significant presence in the retail side of the industry. Secondly, the vehicle manufacturer was required to have a minimum of 30% indigenous content. And finally, the manufacturers would have to be able to provide after sales service through its own outlets [53]. The MNRE scheme however ended in March 2012 (when programmes under the 11th Plan period drew to a close) and the discontinuation of the scheme witnessed a 65% decline in the sales of EVs. This led the Government to extend the MNRE subsidy scheme in August 2012 till proposals under the National Mission for Electric Mobility (NMEM) were formulated.

4.2 Initiatives in the 2011-2012 Budget The 2011-12 Budget, encouraged CNG, LPG and other hybrid and alternative fuel cars uptake in the country. A variety of incentives for EVs and hybrids were also declared. The then Finance Minister, Mr Pranab Mukherjee, also announced the formation of a new interministerial mission – “National Mission for Hybrid and Electric Vehicles” (NMHEV) to promote EV mobility. This initiative was designed to act as a focal point for all the industry's needs on infrastructure, R&D and new incentives. The mission is headed by the Ministry of Heavy Industry & Public Enterprises and stakeholders including Ministries like Urban Development, New and Renewable Energy, and Power along with private stakeholders (industry). The Budget proposed extending the basic customs duty exemption and concessional rate of Central Excise duty (4%) on specific parts such as imported batteries for EVs and concessional rate of 5% on excise duty on hybrid vehicles to incentivize their domestic production. The excise duty on hybrid kits that convert traditional vehicles into more fuel-efficient machines, has been reduced to 5% from 10%. A concessional excise duty of 10% has also been proposed for vehicles with fuel cell or hydrogen cell technology and a concessional excise duty of 10% extended on hybrid vehicles [54].

4.3 Initiatives by Ministry of Heavy Industries and Public Enterprises The Ministry of Heavy Industries is planning to approve a INR 20,000 - 23,000 cr. (USD 3.7bn – USD 4.25bn) plan under the National Electric Vehicle Mission policy to promote EV mobility over the next 8 years. The Government plans to invest around INR 12,250 - 13,850 cr. (USD 2.26bn – Electric Vehicles in India: Challenges and Opportunities 33

USD 2.56bn) [55] and the rest will be invested out by the industry. The funds for this initiative are to be made by pooling allocations given to all the other Ministries, like the JNNURM related funds of Ministry of Urban Development and the Climate Change Fund of the Ministry of Environment [54]. The funds are to be allocated for incentivising private players, giving tax benefits and setting up R&D centres apart from various other activities. The NMHEV will provide incentives and subsidies to customers through manufacturers, based on many parameters such as fuel efficiency and carbon emission standards. The various initiatives proposed by the Ministry of Heavy Industries in the draft National Mission for Hybrid and Electric Vehicles (NMHEV) are [56 & 57] : 1.

Proposing/ suggesting that Public Sector Undertaking banks to offer loans to customers for purchasing EVs so that financing facilities are available for purchasing EVs.

Making mandatory the provision of charging points for electric vehicles in all upcoming housing complexes across the country.

Advising the Automotive Component Manufacturers Association of India to reduce shortages of spare parts by developing and producing components for EV.

Creating EV zones in certain "highly polluted" cities as pilot projects

Funding research & development

Providing charging infrastructure for EVs.

Promoting indigenization

Supporting the development of a cost-effective EV technology for a mass platform and starting operations

Setting a target of 6-7 million units of new vehicle sales of full range of EVs

A National Electric Mobility Mission Plan 2020 (NEMMP 2020) was formally launched by the National Council for Electric Mobility (NCEM) and the Prime Minister of India on January 14th, 2013 [55].

4.4 Government Agencies to take up EV Mobility in India The Department of Heavy Industry, Government of India has constituted a National Council on Electric Mobility (NCEM) and a National Board on Electric Mobility (NBEM) to take forward electric mobility and manufacturing of EVs, including hybrids, in India. They would also look at ensuring that their components are also manufactured in India. NCEM and NBEM are headed by Minister of Heavy Industry and Public Enterprises and Secretary, Department of Heavy Industry, respectively [59]. The National Automotive Board would serve as the technical advisor to both the NCEM and NBEM. Their roles and composition are described in further details below.

34 Electric Vehicles in India: Challenges and Opportunities

National Council for Electric Mobility (NCEM) NCEM is a Government body made up of 18 members including 8 Cabinet Ministers. This has been approved to be the apex body in deciding matters relating to EV mobility. The Council comprises of Ministers from key Central Ministries and Departments along with eminent representatives from the industry and academia. It would be chaired by the Minister of Heavy Industries & Public Enterprises [60]. The NCEM has adopted the National Electric Mobility Mission Plan 2020 (NEMMP 2020) which lays the vision and sets the targets for National Mission for Electric Mobility (NMEM) [61].

ii.

National Board for Electric Mobility The National Board for Electric Mobility (NBEM) has been approved to be set up under the Department of Heavy Industry to aid the NCEM. It will consist of 25 members, comprising of secretaries of stakeholder Central Ministries/Departments with representation from industry and academia. The board will be headed by joint secretary, Department of Heavy Industries. Both the Government agencies will be supported by NATRiP Implementation Society (NATIS) currently, until National Automotive Board (NAB) is created [62].

iii. National Automotive Board (NAB) The National Automotive Board (NAB), after its formation is envisioned to be the technical advisor and secretariat for both the NCEM and NBEM. This board will be responsible for acting as facilitator between the Government and the industry and will promote R&D activities in the sector. NAB will be responsible for sustainable development of the Indian auto sector. The members would be from the Department of Heavy Industry, Planning Commission and from various ministries, including Road Transport and Highways, Science and Technology, and Environment and Forests besides representatives from the academia and the industry. The NAB would be made self sufficient with funds made available from the Automotive Cess administered by the Development Council for Auto and Allied Industries, under the Department of Heavy Industry [63].

Electric Vehicles in India: Challenges and Opportunities 35

Development of EV Charging Infrastructure in India

Development of EV Charging Infrastructure in India While there are a number of bottlenecks in EV adoption, and R&D is being conducted by automobile manufacturers and research organisations to address them, one major issue that must be addressed urgently is the integration of appropriate charging infrastructure for EVs, before a rapid expansion in EV numbers can happen. YES BANK & TERI are of the view that a wide network of public charging stations must be made available.

5.1 EV Charging Infrastructure: Past Efforts There have been plans in the past to develop a network of charging stations in various areas of the country. In 2010, the Delhi Government announced that it would provide a network of charging stations in the city, but only after several EVs were ready for launch in the country [63]. This reflects one of the problems with EVs in general: infrastructure developers are reluctant to invest in this area until there is a sizable population of EVs on the roads, while vehicle manufacturers are unwilling to launch their models in India due to the lack of charging stations [64]. A catch 22 situations. Some manufacturers have tried to address this issue by taking up the challenge of developing charging infrastructure themselves. Electrotherm India Ltd., for instance, stated in 2010 that they would collaborate with local garage owners within a radius of 3 kilometres of major cities like Delhi, Mumbai, Chennai, Bangalore and Ahmedabad for installing charging stations [65]. A similar plan was also articulated by Hero Electric, with the aim of setting up 10,000 charging stations by the end of 2009-10 [66]. However, involvement of the Government appears to be necessary, at least in the early stages, given the investment of approximately INR 2 lack (USD 3700) required for setting up a single charging station [67]. A welcome initiative in this regard is the plan of New Delhi Municipal Corporation (NDMC) to set up 100 charging stations in Delhi in the near future [68].

38 Electric Vehicles in India: Challenges and Opportunities

5.2 Comparison with Compressed Natural Gas (CNG) Infrastructure The experience of CNG distribution in India may be a pointer to the future of EV infrastructure. In 1998, the Indian Supreme Court directed that the Gas Authority of India Limited (GAIL) should expand their CNG distribution network in Delhi from 9 to 80 outlets by 2000, so that a re-fuelling infrastructure for autos, taxis and public buses becomes available [69]. Despite initial teething problems, today this infrastructure is fairly well developed in Delhi. However, expansion to other cities is still an expensive affair. GAIL has estimated that expanding the network to 298 cities by 2014 will require an investment of INR 37,170 cr. (USD 6.8bn) [69]. This compares with an estimate of INR 8000-9000 cr. (USD 1.48bn â&#x20AC;&#x201C; USD 1.67bn) being required to be spent on R&D and country-wide infrastructure for EVs [70]. The essence here is that given the large initial investment that is required for setting up any infrastructure, be it for CNG vehicles or EVs, Government support becomes essential.

5.3 India's Power Sector Any discussion on the establishment of an EV charging infrastructure in India is incomplete without a discussion about India's power sector. In recent years, this sector has assumed increased importance owing to India's rapid economic growth, which has led to an increase in electricity demand both from domestic consumers enjoying a higher standard of living and from the industrial sector whose growth in output is heavily linked to electricity consumption. This sector, therefore, has seen massive investments over the past decade, which has been reflected in a steady increase in the installed electricity capacity. India's installed power generation capacity reached 209.3 GW as of October 2012. The increase in the installed electricity capacity over the past seven years is shown in Exhibit 19.

Exhibit 19: Trend of India's installed electricity capacity and percentage deficit in energy and peak electricity consumption 250

Installed capacity (GM)

200

14 150 12 100 10

0 2004

2005

2006

2007

2008 2009 Year

2010

2011

2012

6 2013

Total installed capacity Energy deficit Peak deficit

Source: Mahindra - Reva

Electric Vehicles in India: Challenges and Opportunities 39

Despite this remarkable increase in the installed capacity, the power sector continues to exhibit a deficit of supply from demand, both in terms of the total energy and peak demand. This deficit has remained largely constant over the years, as can be seen in Exhibit 19. This can be attributed to the fact that the increase in installed capacity, despite being sizable, has still been inadequate to meet the increase in demand. The result is frequent power cuts in most areas of the country, and power grid failures are also not uncommon. This leads to one of the principal concerns regarding widespread deployment of EVs, India struggles to meet its existing electricity demands, and therefore, it would be unwise to impose an additional burden on the power sector. It has been estimated that India's annual power consumption in 2020 is expected to be double the 2009 value of 600 TWh [71], and supplies are expected to struggle to keep up with this surge in demand. It is clear that the gap between electricity supply and demand is unlikely to be bridged in the near future, with problems with coal supply threatening the capacity addition targets [72]. The reliance on coal is another aspect of India's power sector that is unfavourable for widespread EV adoption. A principal advantage of EVs over conventional vehicles is the lack of tail pipe emissions. However, if the electricity is generated by coal or other fossil fuels, this advantage is reduced drastically. As seen in Exhibit 20, in India, presently 57 % of India's electricity generation capacity is based on coal, with nearly 10 % coming from other fossil fuels. This reliance on coal is unlikely to reduce in the near future, since of the capacity addition of 76,000 MW being planned in the 12th Five Year Plan period (2012-17), as much as 63,000 MW is based on coal power plants [73]. Projections suggest that even in 2031, between 67 and 78% of the total electricity generated would be fossil fuel based [74].

Exhibit 20: Break-up of India's power generation capacity in November 2012 [75] Non-hydro renewable 12.3%

Hydro 18.6%

Coal 57.3%

Thermal 66%

Gas 9.0% Nuclear 2.3% Source: Power Sector Planning in India (Kanitkar T. and Banerjee R.,)

40 Electric Vehicles in India: Challenges and Opportunities

Diesel 0.6%

5.4 Smart Grids The scenario outlined above highlights that EVs may not necessarily be less polluting than conventional vehicles, especially given the high Transmission and Distribution (T&D) losses of the electricity sector in India, although the centralised nature of the emissions may ease the application of pollution control measures. For EVs to be truly environment friendly, the use of renewable energy becomes a necessity, but as stated above, the penetration of renewables in India's power sector is likely to remain small in the short and medium terms. For EVs to not threaten India's power situation, it is imperative that any charging infrastructure is not overly dependent on grid supply. Decentralised electricity generation at the charging outlets is therefore the need of the hour. Using diesel electricity generation for this purpose, however, will again negate the point of using EVs. Any decentralised generation will, therefore, have to be based on renewable energy. Renewable energy sources, of course, have their own set of problems. Primary among these is the intermittent and unreliable nature of the generation. To ensure that a steady supply of electricity is available, a storage system will be necessary, perhaps along with a diversification in the sources, with more than one renewable energy source being utilised. Synchronisation of all the different sources with each other, and also with the varying load imposed by the charging outlets, in real time, is a challenge that requires the use of smart grids. A smart grid is generally defined as an intelligent electricity distribution network that is supplied by a diverse range of energy resources. A smart grid may either be connected to a conventional grid or be isolated and supply to a localised load only. A smart grid is an application of digital information and communication technology (ICT) and uses advanced sensing, communication and control technologies to optimise electrical power generation and delivery within the domain of the grid. A smart grid allows dynamic communication and balancing of the electrical network, thus minimising losses and increasing the stability of the grid. Unlike conventional power grids, which handle only a one-way flow of electricity from the generator to the outlet, smart grids require a two-way flow of information, and as will be explained later, may even handle a two-way flow of electricity. An example of a smart grid is the system set up by TERI in Gual Pahari, Haryana, India. This smart mini grid is driven by state-of-art power electronics devices and controlled through ultra-fast digital technology based on National Instruments CompactRIO and LabVIEW which offers a higher degree of flexibility, reliability, efficiency and safety of complete power system. This smart mini grid system involves the integration of the following distributed energy resources: •

A 10.5kWP Solar Photovoltaic (Crystalline silicon based solar module) system

•

A 2kWP Solar Photovoltaic (Crystalline silicon based solar module) system

•

A 1kWP Thin-film based Solar Photovoltaic system

•

A 3.3kW Wind Turbine Generator (WTG)

•

A 100kW Biomass Gasifier (woody) system

Electric Vehicles in India: Challenges and Opportunities 41

â&#x20AC;˘

A Battery Bank of 48V, 600Ah for energy storage

â&#x20AC;˘

Diesel Generator sets/Utility Grid.

Exhibit 21: Complete Single Line Diagram (SLD) of Smart Mini Grid System developed by TERI

Source: TERI (The Energy and Resources Institute)

The load of the TERI Retreat complex, which varies quite widely depending upon the season, occupancy level of the residential premises, the number of conferences being held and several other factors, is managed by this smart mini grid. Smart-grid technology can enable the EV-charging load to be shifted to off-peak periods, thereby flattening the daily load curve and significantly reducing both generation and network investment needs [75]. However, the complexity of the grid operation means that the development of standards that ensure interoperability of the diverse components both on the supply and demand sides becomes essential [76]. This is more so because EVs can represent not just a load for smart grids, but also a source. In the long run, it has been postulated that EVs can function as distributed energy storage devices, feeding back electricity stored in their batteries to the grid. This mode of operation, known as vehicle-to-grid (V2G) supply, will see EVs absorb extra energy when power demand is low, and release it back to the grid when the demand is high.

42 Electric Vehicles in India: Challenges and Opportunities

V2G operation is not yet commonplace, but its groundwork has already been laid. In 2009, the US state of Delaware passed a bill, which would compensate owners of EVs for electricity sent back to the grid at the same rate at which they were charged for drawing power. Consumers will be 'net metered', meaning that they will only be charged for the net amount of electricity that they draw from the grid [77].

5.5 Requirements for Smart Grid Deployment The above points should make it clear that a smart grid dedicated to EV charging, and one that relies primarily on renewable energy for supply, and is capable of absorbing electricity back from the vehicles, is the way forward. The development and large scale implementation of such smart grids requires extensive planning, and resources beyond what a single private player may be able to provide. This is because in addition to the charging outlets, arrangements have to be made for installation of the electricity generating equipment based on different resources, such as solar, wind and biomass energy. Automation of the system is also a specialised task that will depend on one hand, the energy resources available and their characteristics, and on the other, the charging load profile. Land requirement for installation of these grids is also likely to be more extensive than for simple charging outlets, with the charging stations possibly being placed at locations far away from the points of generation. The desirability of off peak EV charging, coupled with the relatively long charging times, means that it will be most convenient for consumers to charge their vehicles at home, therefore, the smart grids must be integrated into residential areas, which means that property developers are stakeholders for smart grid deployment. However, the problem of 'range anxiety' among EV owners means that an extensive network of charging outlets near highways is also necessary, bringing highway development authorities into the picture. Connectivity to the main grid, and metering, especially for V2G, requires careful planning on the part of the national electricity authorities, with test projects perhaps being required before wider implementation. In any case, development of common standards for the charging infrastructure will mean Government intervention, in the way that the National Institute of Standards and Technology (NIST) is working on developing common standards in the USA [76]. It is clear therefore, that a large-scale effort is necessary for solving the principal barrier that remains for EV deployment, viz., implementation of an independent, renewable energy- supplied, smart grid-based charging infrastructure. The need of the hour is for Government initiative in this regard, so as to mobilise, the diverse set of stakeholders ranging from research institutions, renewable energy suppliers, financial institutions, EV manufacturers, power companies, policy makers and consumers. Only after all these parties are on board can EVs hope to move beyond a niche technology. Here, the Government may explore several partnership structures with the private sector, and public sector companies for that matter, which have the technical and business expertise to develop and maintain urban smart grid projects through Build Operate Own (BOO) and Build Operate Transfer (BOT) mechanisms. However, it is imperative that traditional OEMs work towards developing EV variants, ranging from hybrids to full electric variants.

Electric Vehicles in India: Challenges and Opportunities 43

Emerging Business Models

Emerging Business Models There are a range of different business models and financing structures that have emerged globally around the intersection of three critical segments of the EV value chain â&#x20AC;&#x201C; automotive, battery and charging infrastructure â&#x20AC;&#x201C; that are resulting in innovative strategic partnerships that aim to spread risk and make EVs an economical offering for the end consumer [78]. Some of the prime emerging business models include:

6.1 Direct Vehicle Sales Akin to the sale of conventional vehicles, the relationship between consumer and automotive manufacturer remains relatively unchanged, where the EV manufacturer relies on retail outlets to sell their vehicles to the consumer. The upfront cost of an EV in such an arrangement is likely to be high and therefore it would only appeal to a niche group of committed green consumers who are able to afford it. The price of the EV includes the battery, which makes up a significant proportion of the total cost structure. EV manufacturers in partnership with battery suppliers would have to provide a warranty on the battery since the expected lifetime of the battery is about six to eight years, much less than a conventional ICE [78]. Given the short life span and high cost of the battery, the second hand value on an EV would be below par. However this concern can be addressed by OEMs or battery suppliers by creating buy-back mechanisms that guarantee an acceptable price for used/depleated batteries or through battery swap schemes that offer customers a discounted price for a new battery. This would help improve the overall value proposition of an EV. This model requires a high level of consumer education and awareness to effectively communicate the low operating cost of an EV when compared to conventional vehicles. Given a

46 Electric Vehicles in India: Challenges and Opportunities

fair level of awareness coupled with the rising cost of fossil fuels, consumers, would potentially find appeal in the significant cost savings accrued from using electricity, as it would partially pay for the higher upfront price of the EV. Direct vehicle purchases give consumers the autonomy and flexibility to sell or trade the car whenever they desire.

6.2 EV Leasing This model proposes a significant change in the way a consumer purchases a vehicle, as the ownership of the vehicle primarily remains with OEM or authorized service providers that lease out the vehicle for a predetermined period of time. The key advantage of this model is that it reduces the upfront purchase price (which is prohibitive for a large proportion of consumers in India) by spreading it over the lease period. Manufacturers could also offer consumers an option to transfer ownership of the vehicle at the end of the lease period at a discounted price, along with an extended warranty/insurance scheme on the battery pack, which would help improve the residual value of the EV. This model is feasible for consumers that may not have a permanent residence or do not have access to a dedicated charging point. Most new residential constructions in urban India have dedicated parking, either in the form of multi-level or underground parking, that could potentially accommodate installation of charging for points for EVs. EV leasing might also be a favourable option for those early adopters or techno-conscious consumers that would prefer to upgrade their vehicle every few years as battery technology and other vehicle innovations are gradually developed and introduced in new EV models.

6.3 Battery Leasing and Swap Schemes To reduce the initial upfront purchase price of an EV, the cost of the battery is dissaggregated from the selling price thus rendering the vehicle affordable to a wider segment of consumers. Consumer does not purchase the battery along with the vehicle eliminating battery risks and rendering issue of warranty a negligible concern. For most consumers, it would take several years to realize fuel savings that are able to offset the high upfornt cost. Battery leasing/swap schemes would help negate consumer concerns about battery durability and performance, while simultaneously reducing the initial/upfront EV purchase price. Service providers (battery leasing agents/ franchised dealers) retain the ownership of batteries. This model puts the operational costs of an EV on par with conventional ICEs, where the cost of 'fuel' (i.e. subscription fee for battery leasing), includes the combined cost of electricity and the amortized cost of the battery pack. An advantage of this model is that it allows manufacturers to retain ownership of the battery for various 'second-life' applications (potentially in renewable energy storage and power grid management), that would provide additional value [79].

Electric Vehicles in India: Challenges and Opportunities 47

As an added measure to encourage early adopters, manufacturers could also consider leasing the vehicle and the battery together as this would help further spread the entire price over the leasing period, similar to a subscription/car rental service. At the end of the contracted subscription/rental period, the EVs would then return back to the franchised dealer network, giving them greater control over its assets. Manufacturers, battery suppliers and service operators can partner to collectively develop 'battery swap/switiching stations', similar to existing petrol/diesel stations, around a subscription service model, where EV owners can drive in and swap depleted batteries for fully charged ones.

6.4 Infrastructure Service Models Charging infrastructure is one of the key components of developing an effective EV ecosystem, as potential consumers face 'range anxiety' and are concerned about where they might charge their EVs. However, initial studies conducted by Mahindra-Reva in urban areas indicate that individuals travel less than 80 kms in a day [43], while most available EVs have a range of over 80 kms on a single charge, and are not likely to require wide spread public charging points. If consumers have access to a fixed charging point at their residence, they would be able to meet their daily charging needs by connecting to their own dedicated charging point in the night, when the car is idle and remains unused. Yet, in many rented properties and apartment blocks in urban India, installing charging sockets could be complicated due to the lack of dedicated parking spots. The availability of public charging is largely a perception problem, as the existance of public charging points, are likely to make potential consumers feel comfortable driving EVs, as they are psychologically assured that they would have access to charging facilities in the event that their battery gets depleted en-route to their destination. Nonetheless, establishing a visible EV charging infrastructure is likely to help overcome 'range anxiety' among consumers, as it is one of the key drivers of EV adoption [43]. In order to develop a commercial public charging infrastructure, cost and scale are two critical factors, as setting up charging infrastructure is expensive and consumer demand is unknown [78]. In the initial stages it would be important to identify the right zones to set up charging points and also the relative proximity of charging points. It is therefore important to conduct feasibility studies to identify how, when and where consumers are likely to charge their vehicles. This is a 'chicken and egg' situation as there is no financial imperative to install charging points until there is a large enough fleet of EVs on the road and consumers will not buy EVs until there are adequately available charging points. Three prevalent business models that have emerged around managing charging infrastructure include â&#x20AC;&#x201C; a.

Public Infrastructure Model â&#x20AC;&#x201C; providing charging points in public parking spaces. This involves reserving spots at which a charging point is provided for electric vehicles at public parking spaces. Since only EVs are allowed to park at these spots, they are likely to act as an incentive to consumers in urban cities where public parking is scarce, only if adequate

48 Electric Vehicles in India: Challenges and Opportunities

spaces are reserved for EVs. This model would have to be supported by local municipalities in partnership with infrastructure providers. It seeks to provide access to charging for those consumers that lack home charging. b.

Private Infrastructure Model â&#x20AC;&#x201C; This is a preferable model in the early stages of EV adoption as it responds to direct consumer demand. It involves installing charging points for EV adopters at their residence or at private sites such as malls, office parking lots, privately managed parking lots, petrol pumps etc. This ensures higher usage of charging points based on actual demand, as reflected by EV purchases, thus providing a greater return on investment [78]. Government mandated building codes can also recommend installing a minimum of two to three electric vehicle charging points at parking lots in new buildings.

End-to-End Solution â&#x20AC;&#x201C; This model involves close partnerships between OEMs, infrastructure facility providers, maintenance services providers and local Governments â&#x20AC;&#x201C; to provide consumers with an integrated package of end-to-end value added services, thereby minimizing the number of interfaces that the consumer has to manage [78]. This could evolve as a subscription service where EV adopters pay a monthly/annual fee for an integrated services package that involves access to charging facilities, vehicle maintenance services and free parking at public pay-and-park lots, that are managed by local municipalities.

Apart from mere technical aspects around the blueprint of EVs, players in the EV space should shift towards developing comprehensive models that integrate vehicles, infrastructure and allied services. The most significant step towards reducing the barriers to EV adoption revolves around coming up with an integrated effective business model, one that links together the interests of carmakers, owners, infrastructure developers and policy makers [80].

Electric Vehicles in India: Challenges and Opportunities 49

Final Chapter: Analysis and Thought

Final Chapter: Analysis and Thought 7.1 Short Term Horizons The 2W ICE market is growing at a phenomenal pace, approximately 14%/annum [81] in terms of volume sales in urban and rural India. We expect 2W ICE sales to continue expanding along the same trajectory on the premise that as income levels rise and the Bottom of Pyramid (B-o-P) segment becomes more upwardly mobile, there will be a shift from using bicycles to 2W. This trend, backed by the encouraging growth in the 2W EV sales in urban India as compared to EV 4W sales indicates that the uptake of 2W EV in the shorter term (5-10 years) will be more robust as compared to the uptake of 4W EV. 2W EVs do not require as much electrical input as 4W EVs mainly due to smaller battery sizes. Considering the sporadic supply of electricity in semi rural and rural India, 2W EV may not experience robust sales in these markets. However, cost conscious urban dwellers may purchase an 2W EV as a second vehicle rather than a primary vehicle which can be used by family members to travel short distances. A low price tag aided by state subsidies makes electric 2W affordable where there are a range of financing options available from financial institutions. Due to higher sales volumes as compared to 4W EV, insurance companies are able to charge lower premiums. With a favourable policy/regulation climate and consumer appetite for 2W EV vehicles backed by readily available consumer finance and lower risk perceptions to facilitate corporate finance decision making, the growth story of the 2W EV market in India is sound.

7.2 Long Term Horizons EV 4W manufacturers are addressing risk concerns across the value chain with innovative business models and cautious capacity expansion. Although OEMS

52 Electric Vehicles in India: Challenges and Opportunities

have taken some giant leaps forward in terms of technology, leap frogging the hybrid and alternative fuelled engines phases and jumping straight to EVs, still faces major infrastructural hurdles, in India, that impedes the dynamic growth of the 4W EV market. India suffers from severe energy deficiency, power generation and supply capacity to meet rising demand to power from industrial and commercial activity as well as homes with a rising number of electrical appliances. Power outages still occur in major cities like Delhi NCR and Kolkata and they are an everyday reality in semi urban and rural India where 24 hour power outages are not uncommon. Furthermore, despite having one of the largest coal reserves in the world, India imports premium coal for efficient thermal power generation. With over 59% of grid electricity being powered by coal, major transmission leakages due to outdated infrastructure, rising demand and insufficient supply, the pollution free, energy efficiency and energy security perspectives of owning an EV simply do not hold weight in India. Considering existing ICE technology has successfully reduced toxic fume emissions and improved fuel consumption, whereas coal combustion for electricity generation continues to be amongst the most environmentally offensive industrial activities, introducing EVs as a mainstream personal mobility solution into this ecosystem could have a more detrimental impact on the environment as compared to existing and future ICE technologies. Some OEMs have developed innovative solutions to offset the consumption of coal powered grid electricity by incorporating solar panels into the roof design of EV cars as well as supplementing electricity feeds into charging ports with renewable energy. However, renewable energy retrofitting for EV is still a relatively expensive proposition and a technical challenge for developers, hence we can only expect to see such solutions becoming mainstream in the long term. RE retrofitting for EVs and EV charging stations have the potential to earn OEMs and charging service providers Certified Emission Reduction (CER) under Clean Development Mechanism (CDM) and Bureau of Energy Efficiency (BEE), Energy Saving Certificates (EsCerts) under the Perform, Achieve and Trade (PAT) scheme which will facilitate faster RoIs and validate the claim of EVs being a clean mobility solution. Considering a lack of 4W EV options and variants in the Indian market and that they are currently being showcased as alternatives to low range personal urban mobility where customers have purchased 4W EVs as a secondary and tertiary vehicle, it is not surprising that the Government is not considering immediate development and deployment of smart grids and public charging infrastructure. As EV uptake increases, it will become critical for OEMs and/or utility companies to work with Municipal authorities to install charging points that receive supplementary power from renewable sources. The public charging points will serve a dual purpose as they will increase the visibility of EVs to the public thus giving comfort to potential buyers. Studies are currently being undertaken to understand how highly visible public EV charging facilities shape consumer perceptions and decision making.

Electric Vehicles in India: Challenges and Opportunities 53

7.3 Concluding Thoughts 2W ICE vehicles will continue to dominate sales in the Indian personal mobility market where rising petrol prices may steer consumers towards exploring 2W EVs . Since 2W EV are essentially used and ideal for short range travel and existing EV battery technology only allows limited range travel on one charge, the consumer transition from ICE to EV in the 2W segment will be relatively smooth. In fact many 2W consumers are already migrating to 2W EVs due to the tremendous long term operating cost savings and attractive chassis design, where the industry enjoyed growth rates of up to 200% in sales year on year. However, the recent withdrawal of consumer focused subsidies by MNRE for 2W EV has significantly dented sales, which have dropped by over 70% (from 7000 per month to 2000-3000 per month) and leading to the widespread closure of dealerships [82]. The 4W ICE market is growing at a rate of 5% per annum [81], however this growth has not been mimicked or enjoyed by the 4W EV market considering the various challenges highlighted in this paper. Despite supportive Government subsidies, high petrol & diesel prices and informative advertising on the economic and environmental virtues of going electric, there has been minimal impact on sales. Value chain risks for the EV sector resemble that of the regular ICE market, with the addition of battery manufacturers, adverse consumer perceptions & utilities. Ultimately, the future efficiency and cost effectiveness of the EV value chain is hugely dependent on product innovation and growth of EV battery manufacturers' production capacities. Further, the key roadblock to EV market growth do not seem to be related to the value chain, lack of charging infrastructure, policy, economics or environment related, but rather Indian consumer perception. More specifically chassis design, range anxiety, concerns about battery longevity, cabin capacity and high purchase costs are the key factors considered when a vehicle purchase decisions are made. Further, it is 'competition' which triggers product innovation and the presents 'choice' to the consumer. In the Indian 4W EV market there is simply no competition. Currently, Mahindra REVA is the only OEM that is manufacturing and selling 4W EV at scale in India, however, their offering cannot be compared by customers to any other 4W ICE vehicle in the same price range/category. It is therefore unimaginable at this stage, and for the short term, that a buyer will purchase a 4W EV as a primary mode of mobility, but rather a secondary vehicle for short range travel, as the current consumer trends suggest. YES BANK and TERI BCSD believe that a real turning point for 4W EV sales in India will come when it is considered as a primary vehicle. Increased OEM competition in this space is critical as it will lead to further value chain efficiencies and product innovations with particular emphasis on attractive chassis design, improving battery technology leading to increased range and economies of scale, ultimately leading to lower purchase prices. These developments will shape consumer perception of 4W EV as being a credible primary mode of personal transport where environmental and operating costs will not be the only factors considered.

54 Electric Vehicles in India: Challenges and Opportunities

Finally, major multinational OEMs are launching hybrid and hydrogen fuelled vehicles in the International markets to much fanfare. Oil and Gas majors are advocating bio-diesel and hydrogen as future fuels as they will be able to leverage their refinery, logistical and refuelling infrastructure, therefore sustaining their business models. Their influence on ICE design, shaping OEM strategic directions and Government policies are also well known. With these realities and trends in mind, OEMs will be wise to develop and implement alternative business models to leverage an existing ecosystem and be a part of the incremental transition from ICE to EV, rather than going against the grain and pushing a disruptive technology, in a market, consumer landscape, and manufacturing ecosystem that is simply not ready for it, yet.

Electric Vehicles in India: Challenges and Opportunities 55

Acknowledgement YES BANK would like to thank Mahindra-Reva for contributing thoughts and research articles that have enabled YES BANK and TERI BCSD to produce this knowledge paper.

56 Electric Vehicles in India: Challenges and Opportunities

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