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How UK policymakers should redesign their EV incentives to better support British citizens

UPDATE: OCTOBER 18, 2023

GOOD NEWS FOR EV BUYERS IN THE UK. WITH THE RELEASE OF THE REFRESHED MODEL 3 IN THE UK & IRELAND, THE PRICE OF THE TESLA MODEL 3 RWD HAS BEEN REDUCED BY £3,000 TO £39,990. AT LONG LAST! (PERHAPS THE TIMING WAS DONE TO CO-INCIDE WITH THE Q3 EARNINGS CALL?) UK POLICYMAKERS SHOULD CONTINUE TO WORK TO BRING DOWN EV PRICES FOR THEIR CITIZENS.

ELECTRIC CAR PRICES AS SEEN FROM EAST SUSSEX

Spare a thought for my brother, Chris. He lives in East Sussex, England and is considering buying an electric car. Yet the popular Tesla Model 3 RWD costs around twice as much for him in England (with a net price of £40,140) as it does for me in Quebec (net price of £20,178).

The price that Tesla set is the MSRP and Tesla does set different prices for different countries. The MSRP prices for Tesla cars are broadly similar across Canada and the US and broadly similar across different countries within the European Union. The MSRP for the Tesla Model 3 RWD is substantially more in the UK than these other trading blocks. At an MSRP of £42,990 it is around 20% more expensive in the UK than in EU countries and 35% more expensive than North American countries.

If only he could, my brother could go across the border to Ireland and get a right-hand-drive drive Tesla Model 3 RWD at this cheaper EU price! Yet with Brexit, importing cars from the EU now means paying an extra 20% import VAT and Chris would also need to brace himself for the paperwork (or pay others to do the paperwork). Incidentally, in Australia and New Zealand, which are also right-hand-drive, the MSRP of the Tesla Model RWD is similar to the MSRP in the US and Canada at around £30,000.

HOW TESLA SETS PRICES

Tesla sets prices according to demand and how it matches with their supply. To be able to do this, Tesla have set-up a digital reporting structure which provides real-time information on sales for each car in each country.

“We have real time information on demand. So, we know how many people place an order for a Tesla yesterday. So, the computer calculates that all and literally every day we get an automated email … that says how many people place an order in which countries for which cars. …. So, we are basically adjusting our pricing to match demand. And we did a big price drop in Q1.”

Elon Musk from an interview with CNBC anchor David Faber on May 16 2023 (6 mins 40 secs in):

POLICYMAKERS CAN HAVE A SUBSTANTIAL IMPACT ON EV PRICES AND DEMAND

It is essential for policymakers to fully appreciate the impact that they are having on EV pricing, which can be foundational. The big price drop that Elon Musk mentioned was triggered by the way that US policymakers implemented their EV incentives as part of the Inflation Reduction Act (IRA). It is an extraordinary story and instructive for what policymakers in the UK should be considering.

The Inflation Reduction Act was announced on July 27 2022 with a series of measures to stimulate adoption of cleantech technologies. It would take time to design these measures and so the plan was that they would be implemented at the start of 2023. Tesla, along with many other cleantech companies operating in the US, experienced softening demand in the latter half of 2022 as customers delayed their buying until they could take advantage of the incentives the following year. Rather than interrupt the production and flow of vehicles, Tesla used price to manage this demand disruption by offering year-end discounts of $7,500 to all Model 3 and Model Y cars in the US. Via a ripple effect, some year-end discounts were also offered in Mexico and Canada.

From January 1 2023, EVs in the US became eligible for a US$7,500 tax credit according to certain rules. The tax credit applied to (smaller) cars to a limit of $55,000 MSRP cap and for SUVS with the limit set at $80,000 MRSP. As part of these rules, it was announced on December 30 2022 that the Model Y (5 seat variant) would NOT be considered an SUV, and would need to be priced at a maximum of $55,000 to be eligible for the tax credit. These rules shocked Tesla with Elon Musk considering them ‘messed up’ and ‘bizarre’ since the Model Y is designed as an SUV and was then priced considerably more than the $55,000 threshold and so not eligible. The Model Y Long Range was then priced at $65,990 and the Model Y Performance at $69,990. The Model Y Standard Range was not available in the US at this time and has since been reintroduced on April 7 2023.

In my opinion this ruling does seem quite unfair to Tesla, but if the intent was to encourage lower EV prices for consumers it was spectacularly successful!

In early January 2023, Tesla Model Y inventory was rapidly increasing as a result of reduced demand following the ruling. Tesla was being squeezed and needed to act! On January 12 2023 Tesla announced a $13,000 price drop in the MSRP for Model Y Long Range down to $52,990 to make it eligible for the tax credit, worth $7,500. As a consequence, eligible consumers would now be paying nearly a third less for this car with a saving of $20,500 ($13,000 + $7,500). The price reductions cascaded out from this trigger. Tesla also needed to maintain demand for other cars in their portfolio and so substantially reduced the prices of all variants of Model 3, Model S and Model X along with the Model Y. Tesla also announced similar price cuts in Canada at this time given the lack of trade barriers for cars between the US and Canada and that any price difference would be obvious given Tesla’s transparent pricing.

On February 3 2023, the US government policymakers changed their position for the Model Y and allowed the car to be eligible for tax credit with the $80,000 cap. Although Tesla immediately raised prices by $1,000, this was a relatively small amount compared to the price drop of a few weeks before. The genie was out of the bottle. Cheaper EVs have arrived in North America and policymakers played a large part in triggering this change.

A goal of policymakers is to encourage EV adoption. By forcing Tesla’s hand on price they may feel satisfaction that they have contributed to the Tesla Model Y being the second most bought vehicle in the US in the first 3 months of 2023 (slide 25). Their intervention aligns with Tesla’s strategic goal to make EVs more affordable and to accelerate the transition to sustainable energy.

But it is not all about Tesla. There are now around 50 EV models in 200 pricing configures available in the US and Tesla’s actions have changed their sales environment with intense pressure to reduce prices. The price of second-hand EVs have also dropped substantially making them more affordable to consumers and making usage of EVs more widespread. This is important given that the key outcome for tackling climate change is NOT sales of new EVs but rather to reduce the fleet usage of fossil fuels.

IF POLICYMAKERS STIMULATE DEMAND IN ONE CUSTOMER SEGMENT IT WILL LIKELY RAISE PRICES FOR THOSE NOT IN THAT SEGMENT

It is also essential for policymakers to understand how the structure of their incentives impact segments of the population who are NOT eligible.

If their incentive programme encourages demand from a target segment it will likely increase the MSRP for relevant cars and depress demand from those NOT in that segment who do NOT benefit from the reduced net price. The opposite is also true. If incentives are reduced then MSRP would then likely be lowered to maintain overall demand. I drew attention to this in a previous blog post for the US where those NOT eligible for the tax credit (such as very high earners) effectively benefitted from the reduction in tax credit by $3,750 for the Tesla Model 3 RWD after April 18 2023 when Tesla made a MSRP price cut of $2,000.

Which brings us to the UK.

As in many other markets, Tesla is by some margin the dominant EV brand in the UK with around 55,000 cars purchased in 2022. Through their website, Tesla promotes the very significant savings for businesses for the Tesla Model 3 RWD of £26,240 calculated largely based on the savings in Company tax relative to a comparable petrol/diesel car. For purposes of comparison with other segments, I have used this figure to create a net price of £16,750 (£42,990 minus £26,240). From Tesla’s perspective, they are seeing the majority of their demand derived from the company car segment due to this tax incentive and are pricing MSRP at a high level to meet this demand. As consequence is that the net price for consumers for the Tesla Model 3 RWD is higher than in other countries at £40,140. (One of the things that alerted me to the importance of the business segment was, when I was doing my daily audit of Tesla prices from Feb to May 2023, the landing page for ordering a Tesla in the UK was for business customers.)

In a nutshell, as I have told Chris, a key reason that UK consumers are facing a higher price for the Tesla model 3 RWD is due to the generous incentives offered to businesses and NOT to consumers.

THREE RECOMMENDATIONS FOR UK POLICYMAKERS TO ENCOURAGE EV ADOPTION

In the spirit of constructively challenging UK policy makers, here are my recommendations. I am going to assume that the objective is to make the most of public money to accelerate EV adoption by lowering the price of EVs to British consumers.

  1. British policymakers should develop their strategic pricing capability and decision-making authority. This means being able to process real-time data about the supply and prices of EVs and use pricing to achieve strategic goals. They should anticipate modifying their pricing levels over time according to changing market conditions and major movements of exchange rates. Given the dominance of Tesla, policymakers should consider a Serengeti Strategy and target these pricing levels at Tesla MSRP prices and their supply lead times.
  2. British policymakers should phase out the support they provide to the company car segment and use the extra tax revenue to support general EV incentives for the British public.
  3. British policymakers should use EV incentives which are targeted at general adoption of EVs and designed to reduce the MSRP of EVs. Like the approach used by US policymakers, these incentives would be eligible for cars under a MSRP price cap. These price cap amounts could use reference pricing compared to the Euro Zone. The proposition to Tesla (and other EV manufacturers) is that due to Brexit it would be possible to control how much price cuts spill over into other markets. Lower MSRP prices for EVs would also be of some benefit to the company car segment (and UK politicians should know that they have publicly-stated business support in designing effective policies to reach net zero).

The UK government has committed to a plan for EV adoption as part of their commitment to reach net zero by 2050. As the next British general election approaches, and following a byelection at Uxbridge and South Ruislip, the cost of green policies to meet net zero is becoming a hot political topic. This article is designed to show how pricing can be used to design green policies that do NOT place a cost burden on citizens but rather the opposite. To this point I am pretty sure that Chris (my East Sussex based brother) would buy his first EV if it cost significantly less!

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