Elon Musk began 2023 by kicking off a price war in the electric vehicle market, slashing the price of a Tesla by as much as £8,000 in the UK.
Now, old-fashioned petrol and diesel car prices could be next in line for a price cut.
As supplies of computer chips and other parts return to normal after the disruption caused by the pandemic, more and more cars are rolling off assembly lines.
A glut of supply – coming at a time when people are still reeling from the cost of living crisis – means we could soon see prices fall, according to analysts at UBS.
With the world’s economy slowing, analysts at the bank believe manufacturers may end up making more cars than can be sold, leading to an inevitable price drop in the last second half of this year.
While this would be good news for motorists, it would be disastrous for the Government’s carrot and stick efforts to get drivers to switch to electric.
Family cars account for roughly 12pc of Britain’s greenhouse gas emissions and tackling this is a key part of the plan for Britain to reach net zero by 2050.
The Government has already announced plans to ban the sale of new diesel and petrol cars by 2050 in an effort to encourage people to go electric.
However, the market still remains highly price sensitive. Interest in electric cars jumped at the start of 2022 as Russia’s invasion of Ukraine sent petrol prices soaring. Yet it waned as the year went on, just as electricity prices began to soar and petrol prices eased.
Petrol and diesel cars are already cheaper up front than electric models and a price war in the fossil fuel-powered sector would dent electric car sales, says Professor Mohan Sodhi of Bayes Business School at City University.
“A petrol car is far more convenient, you still have a £7,000, £8,000, even £10,000 gap [between petrol and EVs] and you don't have to worry about where to charge it,” he says.
Until last year, the Government provided grants towards buying electric vehicles. But the lack of aid today and the yawning price gap means battery-powered vehicles are now a tougher sell.
Besides green credentials, the main selling point for electric cars was that they are cheaper to run than petrol for low-mileage drivers. However, falling petrol prices since last year have narrowed that advantage.
“It's a bit of a topsy-turvy world right now,” says Prof Sodhi.
Direct comparison between petrol and electric is difficult because of a lack of models that offer both. However, car makers do make vehicles of similar size.
According to figures from Carwow, a driver covering 8,000 miles per year in a Volkswagen Golf will pay £1,014 in petrol costs at today’s pump prices, plus £210 in road tax.
Covering the same mileage in a similar sized ID.3 electric from VW will cost just £191 in charging fees, if using at home chargers on the very cheapest overnight tariff.
That offers a sizable saving of up to £1,033 a year.
Charge at public chargers and the economics favours petrol cars again. The difference in upfront costs also means that benefits take years to pay off.
Since a Golf costs as little as £26,565 and an ID.3 costs upwards of £39,425, it will take 12 years for the cheaper mileage offered by the electric model to pay off.
Heavy users will benefit more quickly – double the miles and it’s a seven year wait until savings are made – and careful drivers will also benefit from lower maintenance costs, since electrics have fewer moving parts.
The maths becomes much more favourable if driving in London’s congestion zone, where drivers of an electric can swerve up to £2,700 in fees a year.
However, for sales of electric cars to really take off, the prices need to come down to make them feel less expensive to drivers, Prof Sodhi says.
Today, much of the buying market for EVs is made up of well-paid executives buying or leasing through a company scheme, where more than a third the price can be knocked off because of tax savings.
For those without significant tax savings to make, an electric car is still an expensive luxury.
Price decline for electrics will happen, Prof Sodhi believes, as car makers make the switch to battery-powered models and more vehicles roll off assembly lines.
Mark Raban, boss of car dealer Lookers, has his doubts over whether a sudden glut of cheap combustion-powered cars will in fact materialise.
He says the car makers have learned lessons from production from the pandemic.
Trouble sourcing parts led to fewer cars being made. However, this pushed up prices and helped car makers including Volkswagen, Mercedes and Vauxhall-owner Stellantis to record profits in 2021, a track record they may be keen to keep.
On top of this, many car makers including Ford and Mercedes are planning a move to a so-called agency model. Rather than selling stock to a dealer, they will sell directly to drivers and use the dealer like an estate agent. This means overproduction and falling prices will be their problem.
“They're going to clog up their own balance sheets pretty quickly if they don't get demand and supply right,” Raban says.
Buyers are asking about EVs, Mr Raban says, with around one in five buyers going for a battery-powered model.
“This is a trend that is absolutely coming. I mean, the automotive makers have been told to make this product and bring it to market effectively,” he adds.
From next year, one in five cars sold by British manufacturers must be electric. That proportion will rise to 80pc in 2030 and 100pc in 2035.
Ultimately, the Government mandate to make more vehicles will rebalance the market, said Ciara Cook, research and policy officer at New Automotive.
“I don't think that it is likely to be pushed over by short term trends easily,” she says. “Manufacturers are going to have to start shifting focus to selling more electric vehicles.”
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2023-04-07 11:30:00Z
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