Thursday, 16 April 2009

No electric cars for "ordinary motorists"

Electric cars have hit the news today with the announcement by the eponymous Geoff Hoon of a plan to offer subsidies towards the purchase of electric cars as and when they are more generally available than at present, currently estimated to be in about two years' time. As usual the BBC report tries to put this in what it considers the best possible light for the government, describing it as "Motorists will be offered subsidies of up to £5,000". If one digs a little deeper, it seems all is not quite as the BBC portrays.

The Department for Transport website carries the details (here). It becomes clear from the government's own account that there are no firm proposals to give anything to motorists. The main article says it is "an initiative to help put electric cars into the reach of ordinary motorists by providing help worth £2,000-£5,000 towards buying the first electric and plug in hybrid cars when they hit the showrooms". I wonder what "help worth £2,000-£5,000" means, it doesn't sound much like money to me. Not that it really matters what it means because we find important clarification in the "notes for editors" section at the bottom of the page: "Consumers will be able to receive help from the government worth in the region of £2,000-£5,000 to allow for the maximum choice of which car they buy. We are beginning discussions with the automotive industry and financiers to determine how best to deliver this help." No longer are we in the realm of subsidies being given to "ordinary motorists" for them to use as they will, we are firmly in the territory of giving cash subsidies to the motor manufacturers. And we mustn't ignore than the headline figure of £5,000 is now "in the region of £2,000-£5,000". It is the reference to "ordinary motorists" that troubles me most because I can see that only extraordinary motorists are likely to benefit from any such scheme.

I rather like the idea of electric cars. It would be wonderful if we could reduce our dependence on oil so that we are no longer at the mercy of the OPEC cartel and reliable electric cars would help achieve that. An additional benefit is that the need for a reliable supply of electricity would be even more important than it is today, thereby rendering even more absurd the current lunatic plans for windmills and waves to be substantial sources of electricity generation. To that end I can understand tax breaks for research and development, but it all gets rather tricky once you start fiddling with prices of manufactured products.

There is no reason to think that, left to their own devices, the manufacturers would bring out a product until they are satisfied that it is reasonably saleable. What we usually see with novel products is that they are very expensive when first launched because the manufacturers need to try to recoup some of the R&D costs and they know some people will pay a lot either out of interest in the concept or out of snobbery. It soon becomes clear whether the product is capable of being a long-term profit maker and if it is, the unit price falls as some R&D costs are recouped and the remainder are spread over substantial anticipated future purchases. With electrical products we sometimes find that novel ideas don't take off, hence there are attics around the country containing dusty laserdisc players, betamax recorders and novelty peppermills. The position is rather different with electric cars because, for different reasons that appeal to different people, it is necessary to wean ourselves off oil and the only alternative with any reasonable prospect of being workable in the short term appears to be electricity. So the manufacturers can be fairly sure that a reliable electric family car with a reasonable range is likely to be a long-term success.

If, as the government suggests, such cars should be available as early as 2011 (I'll believe it when I see it) it is hard to see that the manufacturers could sensibly price them in line with petrol and diesel cars because they would then forgo the additional price that could be commanded through sheer novelty value. If we assume (and I pluck these figures out the the thinnest of airs) that a petrol driven car will cost £14,000 and the closest equivalent electric model could sell for £20,000, they would be mad to price it at anything lower than £20,000. As the novelty value wanes and production increases we might find it can sell for £17,000 and make the same profit as the £14,000 petrol vehicle, it might even be that further technological developments would allow it to undercut the petrol powered car. The market will determine price as it does for petrol and diesel cars and as it has for other new products such as flat-screen televisions and those frightfully complicated mobile phones that can make you a cup of tea while you talk.

Where does subsidy come in? Perhaps the manufacturers could be given £3,500 per car to start with so that they sell at £16,500 instead of £20,000. This might accelerate demand and lead to additional early sales but it would also mean that those prepared to pay £20,000 get a bargain. Those who were not prepared to pay £20,000 but were prepared to pay £16,500 enter the market earlier than they otherwise would. What is the value of those accelerated transactions? Is it sufficient to justify the taxpayer chipping-in £3,500 per vehicle? I don't know, but it is worth considering what the earlier purchase of goods really means. Say you would buy at £16,500 two years later when the price naturally fell to that level and now you can buy immediately because of the subsidy. You are not receiving £3,500, you are spending £16,500. The seller is receiving £20,000 now rather than £16,500 in two years' time, so he is getting the same lump sum from the same customer that he would otherwise have to wait to receive and he is being paid £3,500 for the privilege. Those who would pay for novelty value - which with high priced items like cars means people of quite substantial means - receive a bonus, manufacturers and/or retailers receive a bonus by making sales early and being paid for doing so, and the ordinary motorist gets only the fun of having a new car two years early. Then he has to get his next new car two years earlier than would otherwise happen and over time his benefit is negligible. And we mustn't leave out of account the possibility that the manufacturers/sellers will price the product at £23,500 so that it can be sold at £20,000 thereby ensuring they get both the full potential of novelty value and the taxpayer subsidy. They will do their sums and decide whether they are better off cashing-in on novelty value or on accelerated future sales.

However the scheme is arranged it will most assuredly not result in "ordinary motorists" receiving a benefit anywhere near close to the cost they pay wearing their other hat of "ordinary taxpayers". Oh, I must add something else. Those with chauffeurs, nice ministerial vehicles and grace-and-favour homes provided free of charge probably don't know this, but most "ordinary motorists" can't afford to buy new cars.


MYgirl said...

May be there is in future

Stitch's Master said...

I suspect Hydrogen Cells are the way to go rather than battery powered electric!

TheFatBigot said...

I have heard that suggested Mr Master and maybe it will be so in time.

Alex Cull said...

There's also a horrible irony, in that if this electric-car initiative does come to fruition in 2011, it may well be just in time to encounter the first blackouts caused by our power stations starting to go offline without being replaced. Not good for vehicles that are dependent on mains electricity.

Japan used cars said...

The main advantages of electric cars are convenience, environmental benefits and fun. EVs are fun to drive while you are doing good things for the world.