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How Fit for 55 could drive innovation in electric vehicle space

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The European electric vehicle market is going to see a massive change in terms of investment, innovation, product introduction over the next one and a half decades, thanks to the Fit for 55 legislation proposed by the European Commission in an attempt to reduce vehicular CO2 emissions by 100% by 2035.

When we talk about electric vehicles, Europe is certainly way ahead of any other continent in adopting green zero-emission vehicles across different segments. Not only the European auto manufacturers are focusing more on electric vehicles, but the consumer mindset towards green mobility in the continent is much positive compared to other continents, even North America as well.

To advance the electric vehicle adoption drive further, European Commission on July 13, 2021, has proposed a legislation. Under this, the European Commission has proposed a 55% reduction in the CO2 emissions from the light vehicle category by 2030 compared to the current emission level. Subsequently, this strategy aims to achieve 100% CO2 emission reduction by 2035.

This strategy for the light vehicles comes as part of a wider package, dubbed as ‘Fit for 55’. If this proposal gets approved by the European Parliament, it will mean that all the new cars registered in the year 2035, will come as zero-emission vehicles, more likely electric vehicles. Clearly, this will expedite EV adoption in the continent further.

Clearly, pushed by the government and authorities, the auto manufacturers and battery manufacturers will expedite their EV drive. This will eventually the European EV ecosystem to grow and expand faster. Subsequently, it would help the global EV growth pace as well.

Talking about the Fit for 55 proposal, Monika Punshi, Senior Research Analyst, Powertrain and Compliance, IHS Markit, said that this program is going to have a very massive and significant exhilaration towards electrification by the car manufacturers and the battery manufacturers in Europe. “Based on our latest forecast, in 2021 initially we believed that out of 40% of pure battery electric vehicles 37.5% targets will be achieved by 2030, which is the current legislation. But now, under the proposed legislation, we have seen that this 40% needs to be increased to 55% of pure battery electric vehicles share by that year,” she added in an exclusive podcast with Autofintechs.

She also said that the proposed legislation is going to bring a significant change in the demand for lithium-ion batteries. “Under the current legislation it is close to 350-gigawatt hours but with the proposed legislation, it is expected to reach about 468-gigawatt hours,” Punshi further added.

The huge investment required for achieving this target will need additional investments from both light electric vehicle manufacturers and battery suppliers as well. Estimates are that around 8-10 billion euros will be required to be invested by battery manufacturers to meet the additional capacity demand. In the case of vehicle manufacturers, the investment volume is going to be around 12 billion euros. This investment will be used in the procurement of battery packs, other components and practical extensions.

Investment in innovation

A huge chunk of the investments by both the battery manufacturers and vehicle manufacturers will be spent on R&D and innovations. Thermal management, higher battery density, more efficiency are some of the segments where the automobile industry and its supply chain stakeholders are focusing enthusiastically and investing huge sums.

According to Monika Punshi, the innovations will be majorly led by the battery manufacturers and even the vehicle manufacturers as well. Both these players will work together and build improved chemistries for EV batteries. “We have seen some recent announcements by battery manufacturers for new battery plants or expansion of the existing plants. These battery manufacturers can be from any region – China, South Korea, Europe or the US. Overall, there are huge investments going towards the R&D space,” she explained.

Innovations and vehicle cost

The cost of electric vehicles is one factor that plays a crucial role in the EV growth pace. The high cost of electric vehicles has been barring many potential buyers to shy away from transforming their queries and interest towards EVs into purchase decisions. However, experts believe the new innovations led by fresh investments will result in reduced battery pack prices. This will eventually reduce the price of electric vehicles significantly, as batteries contribute the lion’s share for EV prices.

Battery pack prices are expected to be reduced by 35%-40% by 2030 as compared to their current levels.

The battery pack prices are expected to be reduced by 35%-40% by 2030 as compared to their current levels. When this price reduction gets reflected in the price of vehicles, it will further increase the scope for the end consumers to buy more affordable electric vehicles. This will be financially more attractive to the consumers and eventually fuelling growth in the battery electric vehicle segment.

Green bond finding an increasing number of takers

While we are talking about the investments in the electric mobility ecosystem, it covers capital expenditures or CAPEX, operating expenses or OPEX, R&D and all other sorts of investments. In recent times, a change has been witnessed in the investment pattern. This is the issuance of green bonds by the vehicle manufacturers who are working on electric vehicles.

Green bonds are very similar to other types of bonds. The USP of these green bonds is the use of such bonds is towards the climate and the environment. The intent is to better align before making the investment. The European Commission has an established standard for green bonds. It’s a very high-quality standard for sustainable and transparent investments.

Over a couple of years, it has been seen that some car manufacturers have been issuing such green bonds. The funds accumulated by issuing green bonds are supposed to be used towards battery electric vehicles and other advanced propulsion system developments.

There has been another trend as well. Recently, it has been seen that green bonds issued by car manufacturers have been oversubscribed, even 10 times in some cases. This indicates a changing investment pattern by the consumers, which are mostly financial institutions, and qualified investors who want to have a greener investment portfolio.

Also Read: Smaller electric vehicles to reach price parity with ICE counterparts by 2028

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