Depreciation: Looming Roadblock for Electric Cars

When it comes to roadblocks for the electric car market, “range anxiety” — or prospective buyers’ concern that they might get stuck with a low battery without a charge point in sight — often looms large. But as we come within mere months of cars like the Nissan (s nsany) LEAF, Coda Sedan and others becoming available for sale and lease, another question that could give cold feet to would-be electric car buyers is bubbling to the surface: How much will these next-gen vehicles be worth a few years down the road?

According to a report from the UK’s Glass Guide that Autocar picked up this week, a typical electric vehicle will retain only 10 percent of its value after five years of ownership, compared to gas and diesel-fueled counterparts retaining 25 percent of their value in that time period (h/t Autoguide).

Depreciation represents a relatively mundane factor when buyers consider conventional gas cars — buyers can consult guides like Kelly Blue Book and others for a sense of how the value of a given car in previous model years has held up over time. But depreciation involves a host of unknowns for electric models.

CAP Motor Research, one of the UK’s biggest providers of vehicle valuation data for leasing companies, insurance firms, vehicle retail groups and financial institutions, recently described the task of reliably forecasting the residual value of electric vehicles (how much a car will be worth at the end of its lease, which affects where monthly lease payments are set) as being simply impossible. With electric vehicles, the inherent uncertainty surrounding a new technology’s long-term value is exacerbated by the fact that the biggest question mark rests on the costliest piece of the car: the battery.

Glass, meanwhile, is basing its forecast on a “worst-case scenario,” explaining that consumers’ perception may matter more than whatever reality emerges for the technology in this case. Among consumers, Glass anticipates a widespread belief that electric car batteries “will need replacing in the near future regardless of the manufacturers’ predictions of battery life.”

After one year of ownership, Glass expects the residual values for electric vehicles to rank higher than “the segment average” in monetary terms. But if automakers sell the battery outright (rather than lease it) and fail to provide “appropriate warranty” (check out some ideas for new battery warranty schemes here), then an electric car’s value will “fall dramatically until the vehicle is five years old,” Andy Carroll, managing director for Glass Guide, said in a statement.

To improve residual values, he proposes that automakers look to new business models like leasing batteries separately from the vehicle (an idea that companies including Nissan have discussed, but ultimately rejected), removing the cost of the battery from the list price and allowing a guarantee for minimum battery performance as a feature of the lease agreement.

Alternatively, Carroll calls for manufacturers to offer all-in-one leasing packages, with automakers underwriting the capital cost of the vehicle, battery lease and servicing. Nissan, for one, has opted to take financing into its own hands for the upcoming LEAF, which is slated to have one of the lowest price tags of any electric car on the road in the next few years.

Photo courtesy of Flickr user jurvetson

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