Electric Vehicles: Driving Change

It’s not easy being an electric vehicle.

People look askance at your upfront costs, wonder about the charging infrastructure you need, and shake their heads over the time it takes you to fully charge. EV inventory ramp ups are slower than anticipated, connecting to the grid can be problematic, and there are big questions around residual value. And now you’re battling headlines about bursting into flames.

Yet your popularity is growing. Several governmental incentives are in place, and EVs continue to evolve. OEMs, for example, debuted a raft of EV announcements at May’s ACT Expo 2024, a trade event devoted to clean transportation technologies. And a 2024 report by the Equipment Leasing & Finance Foundation noted a dramatic rise in 2023 EV sales, from 4% to 18%.

Above all, your greatest proponent—climate change—remains urgent and front of mind.

So, what’s the best way to get EVs into owners' fleets? That’s a question equipment finance companies are addressing as they partner with clean energy experts to create tools that give clients the handhold they need to get EVs on the road.

Who will be the winners?

The nascent EV market is still shaking out, says John Critelli, Director, SDG Transportation Finance, Mitsubishi HC Capital America.

“Everybody’s trying to pick the winners,” he comments.

It’s a valid concern; in the five years Critelli has been involved in sustainable financing he’s seen companies come and go. “We all want to partner with a solid counterparty that can withstand the test of time,” he notes.

“Most people getting into the EV market never contemplated having to buy the gas station. The vehicle is only one part of the equation; how and where you’re going to charge it is the other half.” 

—John Critelli, Mitsubishi HC Capital America

“It’s an ever-evolving marketplace,” says Charles Carter, Vice President, Services and Solutions, Volvo Financial Services. “There’s an amazing opportunity for customers to transition their fleets to meet their ESG goals. But of course, new technologies can create learning curves for customers.”

The current EV market doesn’t have the luxury of decades of data, as opposed to internal combustion units, Critelli points out: “Gas and diesel have been around a long time. We’ve become comfortable with the collateral, and we understand the lifecycle, vehicle performance and established OEMs. Where this gets cloudy on the EV side is with emerging (start-up) OEMs.”

The charging conundrum

“Most people getting into the EV market never contemplated having to buy the gas station,” Critelli says. “The vehicle is only one part of the equation; how and where you’re going to charge it is the other half.”

And today’s charging infrastructure is woefully inadequate to fulfill the promise of EVs. In January, Bloomberg NEF reported that U.S. public charging stations were 76% below their 2023 forecast as charging operators waited for federal funds.

And right now, there is no secondary market—hence, no residual value—on chargers.

Another complication: to get an EV fleet operational, many fleets install charging stations. While current charger upgrades are done via the software, the vast majority of the hardware portion of charger installations are permanent. Will there be any value in today’s charging stations 10 years from now? “Right now, that’s why it’s being treated as a loan-only product,” Critelli says.

Clients need to have an experienced charging site assessment completed, detailing how many ports are required, where they should be located, and a full understanding of the vehicle’s duty cycle. Most important is whether they will have enough power to service the anticipated amount of EVs. “It’s not a DIY project; customers shouldn’t try to do it themselves,” Critelli says.

As-a-service

All of this is why fleet end-user adoption of EVs is a big gulp. Not only does the vehicle itself come at a huge premium, but users also must look at integrating charging systems into their facilities, train staff and consider their local grid.

Which is why equipment finance firms are starting to partner with experts to create an “as-a-service” approach, which bundles project elements and presents them as a monthly or yearly fee to the user.

“Electrifying a fleet is not just driving an electric bus off the lot. You must pick the right charging system… and understand how to maintain the bus and how to work with the local electric utility.” 

—Gaurav Dubey, Highland Electric Fleets

ELFA member companies Highland Electric Fleets, Volvo Financial Services, Mitsubishi HC Capital America and Inspiration Mobility offer examples of this general approach, although each has a different toolset for their specific markets.

Electrifying school transport

Highland Electric Fleets partners with school districts and other fleet operators to provide a one-stop solution to electrify their fleets, says Gaurav Dubey, Chief Financial Officer. “We help our customers from project planning, funding, procuring the bus OEM and installing the charging infrastructure to training drivers and maintaining the buses,” he says. “We take care of all of the headaches of fleet electrification.”

These services are offered for a fixed price on a 10-to-15-year contract; school buses typically have a 15-to-20-year life cycle and average about 10,000 miles a year. “We know the batteries will last 20 to 30 years, so that’s not a limiting factor,” Dubey says. “We’re signing long-term contracts because that supports the financing of these assets. It also helps with the residual value risk, which can be an issue with three-year leases.”

On the funding side, Highland uses a public-private partnership model, leveraging public incentives with private financing partners. “We layer financing on top of our services, which makes the process of electrification much easier and more accessible for our school districts and other fleet operators,” Dubey says.

“We find that community banks want to finance projects in their communities,” Dubey says. “These banks understand the local landscape and I believe this sort of project is a win-win for them, particularly when you consider the additional health and environmental benefits electrification can provide residents.”

The school bus market alone is sizeable: roughly 35,000 buses are replaced every year, according to Dubey. “There are a half-million school busses in the U.S. and only around 5,000 of them have been electrified,” he says.

Highland’s offer is attractive to school districts and municipalities because it eases the high upfront capex costs of electrification, Dubey says. “While the upfront cost is high, the yearly operating cost is low. We’re taking the risk in investing, and the client returns it to us over the term period.”

“Electrifying a fleet is not just driving an electric bus off the lot,” Dubey says. “You must pick the right charging system, design an efficient charging layout, and understand how to maintain the bus and how to work with the local electric utility. Then we train their people on how to operate and manage the bus.”

In cases where clients want to take a toe-in-the-water approach, they convert to electric as buses need to be replaced. “We’re happy to be part of that education journey,” Dubey says.

Partner up

In May, Mitsubishi HC Capital America joined with charging solutions provider Electrada to provide a Charging-as-a-Service financial package. Electrada serves light-to-heavy-duty fleet customers with charging depots under a performance contract. Under the new agreement, Mitsubishi HC Capital America will provide the financing for the vehicle component in Electrada’s fleet electrification program.

“Customers want an easy entry point into the EV market, and they want an easy exit. They want to get a comfort level and they want the flexibility to try something different.” 

—Charles Carter, Volvo Financial Services

Customers pay a single monthly price that includes the vehicles, charging stations, installation costs, software upgrades and energy. “It really transfers the risk away from the customer,” Critelli says.

Terms are typically a 60-month fixed payment that can be renewed. The truck portion can either be a loan or a lease. While the Mitsubishi HC Capital America/Electrada offer is OEM agnostic, Autocar will be the first OEM to use it as a financial offering to its terminal tractor customers. 

“This illustrates that finance companies don’t need to do it on their own when it comes to electrification,” Critelli says. “Electrada is the expert on everything behind the meter. Finance companies typically do not possess the expertise required to understand the complexities of charging. It’s been up to the customer to decide how they will finance it. This allows us to fund the truck portion and Electrada funds everything else. It leverages our collective strength: we’re really good on the truck side and they’re really good on the charging side.”

Building the infrastructure

Inspiration Mobility brings two business lines to the EV market. It partners with fleets to deliver a comprehensive, EV-first fleet management solution—including traditional fleet services plus EV leasing, charging, grid, etc.—and it develops, builds and operates multi-fleet charging depots.

“EVs change the entire nature of fleet management operations,” says Josh Green, Founder and CEO, Inspiration Mobility. “It’s not as simple as just financing the vehicle and then giving the keys to the driver. It requires an end-to-end solution. It doesn’t mean that every customer must take all the options on our menu, though.”

On the charging depot side of the business, Inspiration Mobility looks for fleet customers that have space on their property where they can host a station, typically with six to 24 charging ports. “That way, they can charge their own vehicles and earn additional revenue by offering it to other local fleets,” Green says. Fleets reserve charging times that work for their operation.

Inspiration will also greenfield depots in locations where there’s a concentration of EVs.

“The tax credits associated with EVs are straightforward. Leasing of EVs is the same as leasing any other vehicle.” 

—Joe Sebik, Siemens Financial Services

Drawing from its team of fleet and clean energy infrastructure experts, Inspiration gives clients an end-to-end solution, partnering with several ELFA members in making this happen.

“Our financing solutions alleviate the pain of the upfront cost for clients and translate them to a multi-year operating payment,” Green says.  “We create win-win structures with our financing partners.”

Clients range from Fortune 500 companies to local taxi services, according to Green. Their fleets can include cars, pickups and medium-to-heavy duty trucks. Inspiration offers lease terms ranging from 13 months to seven years.

Inspiration also brings a thorough understanding of what tax incentives are available to each client, Green adds. “There are federal, state, municipal, and utility incentives, and they are, frankly, a little opaque,” he says. 

“Our customers can take advantage of the federal tax credit in a lease,” Green says. Because that tax credit is fixed—$7,500 for a light-duty vehicle and up to $40,000 for a heavy-duty vehicle—the impact on the lease is greater, he says. “It lowers the vehicle costs in the short term because it’s the same dollars being spread across the lease term, and it’s the same amount whatever the price of the vehicle.”

Driving heavy truck adoption

This May, Volvo Financial Services (VFS) and Volvo Trucks North America (VTNA) announced the creation of Volvo on Demand, built on a Truck-as-a-Service model.

Starting with a fleet of 25 Class 8 Volvo VNR Electric trucks, the program offers a total solution for customers, with terms as short as 12 months. Using the Volvo service and maintenance Gold Contract as a base, the offer can include several options: insurance, available incentives, route planning and optimization, and charging station guidance.

“It’s a bundled solution that provides a single invoice at an affordable entry point,” says Carter. “We’ve really worked on limiting the amount of upfront costs to the customer.”

And the 12-month minimum offer is designed to address a pain point: “Customers want an easy entry point into the EV market, and they want an easy exit,” Carter says. “They want to get a comfort level and they want the flexibility to try something different. We’re going to take a lot of the concerns off the table and we’re not requiring a large upfront investment.”

This single-price strategy will also show customers their usage for the prior month and adjust the invoice accordingly. “The more the customer drives the truck, the lower their price per mile,” Carter says. “We want them to really use these trucks, so we make it to their benefit to do so,” Carter says.

Carter continues: “The initial 12 months should serve as an adequate familiarization time. If a customer decides it’s not the right time to deploy the truck in their operations or they decide they want to buy new VNR electric trucks, we can then transfer the truck to another customer. It’s a win for the customer and it’s also a win for us because we’re able to place trucks with additional customers, driving EV adoption in the marketplace,” he says.

“This doesn’t displace our traditional loans and leases,” Carter says. “Rather, we wanted to tackle customer concerns with EVs head-on and offer them another pathway to electrification.”

VFS started quoting offers shortly after the announcement was made. “Our dealer network has been incredibly interested in this,” Carter comments. Currently, VTNA has 61 dealer locations that are certified EV dealers.

What’s particularly attractive to dealers: “We’ve put the residual value to the side with this program,” Carter says. “We’re taking that responsibility, there’s no residual to be concerned about from a customer or dealer perspective.”

Volvo on Demand currently has 25 trucks available, and the goal is to get them into customer’s hands throughout the year, according to Carter. “Once that nut is cracked, it will be up to market conditions and customer demand whether the program continues,” he says.

The incentive to buy

Consultants such as Highland and Inspiration offer familiarity with governmental incentives as part of their offerings. Equipment finance companies should also become familiar with these tax incentives, such as those in the Inflation Reduction Act of 2022, says Joe Sebik, Director of Tax, Siemens Financial Services, and Chair of ELFA’s Federal Tax Committee.

“Alternative energy makes up 85% of the spending or tax incentives in the IRA,” Sebik says. “Fortunately, the tax credits associated with EVs are straightforward. Leasing of EVs is the same as leasing any other vehicle, something that the leasing industry is very familiar with.”

The federal tax credits for qualified commercial clean vehicles, including EVs, fall under the new Internal Revenue Code Section 45W, Sebik says. These credits, however, should not be confused with those for consumer EVs.

“As charging goes more mainstream and we have larger installations, there’s an opportunity for leasing certain equipment or loans that might be interesting to ELFA members.” 

—Josh Green, Inspiration Mobility

“The rules are different because the consumer rules also look at the user’s income level in determining the amount of tax credits,” Sebik says. “You can have the same vehicle but with different tax rules depending upon who the user is,” he says.

Another consideration is the type of vehicle. Commercial clean vehicle credits apply to both qualified fully electric and plug-in hybrid vehicles as well as vehicles above 14,000 pounds—those commonly used in a commercial environment such as trucks and buses. In addition, non-plug-in hybrids qualify but at a different rate.

Meeting goals

Many large companies such as Walmart, Amazon, Uber and Siemens have a goal to achieve carbon neutrality by 2030. Toward that end, Siemens will replace its 10,000-vehicle U.S. fleet with EVs and plug-in hybrids, Sebik notes.

Such companies, in turn, may use fleet management firms to handle the acquisition, registration, maintenance and disposal of the vehicles, Sebik notes. Unfortunately, some fleet management companies do not have the capacity to use tax credits efficiently, and thus, they cannot pass them on to the lessee in terms of lower rents, he says.

“What might develop is that some fleet management companies may need passive investor/lessors who provide tax-oriented financing,” Sebik says. “These lessors claim the tax credit and then finance the remaining vehicle cost and so pass on the savings to the lessee. This creates a three-party arrangement where the primary lessor owns the assets and provides financing while claiming the tax benefits, and the fleet management companies provide the services they always provided.”

“Right now, the Tax Code is somewhat locked in place for commercial vehicles acquired before Dec. 31, 2032, so there is a window of opportunity open for at least eight years,” Sebik notes. “And once the ball gets rolling and more charging infrastructure networks are put in place, the proliferation of electric vehicles may continue to grow.” 

What’s ahead?

The examples showcased here illustrate where EVs make the most sense right now: in applications where there are set routes, and the vehicles return to a charging station at a scheduled time. Which means it’s not a one-size-fits-all solution.

“This is not a light switch,” Critelli says. “The rate of adoption just hasn’t been there. People need to start thinking about it in terms of decades, not years.”

But this should not deter equipment finance companies from exploring this emerging market, Critelli maintains. “We believe firmly that this is the direction that things will go and even though it’s going to take time, we want to be the financial partner on the journey with our customers.”

As EV and battery technology evolves, “sharing the economics means that finance companies will have an opportunity to provide more services, and thus not rely solely on interest income,” Critelli says. “How do we join forces with some of the best companies in the ecosystem to bring products and services to our customers?”

While financing companies are usually involved on just the vehicle side of the deal, Green sees charging installations as a future opportunity. “As charging goes more mainstream and we have larger installations, there’s an opportunity for leasing certain equipment or loans that might be interesting to ELFA members.”

“More competitors are coming into this space so that’s confirmation it’s a growing area,” Carter says. And it’s not all electric. Hydrogen and biofuels will likely take the lead in long-haul operations. “We’ll need a suite of different solutions to get to net-zero,” Carter says.