Moody’s Highlights Residual Value Concerns of Battery EVs

Residual values for battery-electric-vehicles (BEVs) remain an issue for the auto industry, particularly for auto lease-backed securities, according to a report from Moody’s Investors Service.

Compared to internal-combustion-engine (ICE) vehicles, BEV cars suffer from higher residual uncertainty because of three primary reasons. The first is the lower predictability of BEVs’ value proposition compared to ICE vehicles.

Additional uncertainty includes a short track record of BEV sales in which to predict residual values and manufacturer-specific risks. “However, such dynamics could change over time, especially if BEVs achieve mass market acceptance and price parity with ICE vehicles,” according to the report.

BEV vehicles still grapple with higher prices than ICE vehicles, in addition to shorter-ranges, making their value to a consumer less than that of an ICE vehicle. Over the past three years, the MSRP premium of hybrids, plug-in hybrid electric vehicles (PHEVs), and BEVs over ICE models have declined but still remained high — above 15%.

“For example, the cheapest BEV on the market is the Chevy Spark BEV, which has an unsubsidized MSRP of $25,000,” Moody’s wrote in the report. “Meanwhile, the ICE model of the Spark retails for just $13,000.” And a less-than-robust charging network across the country, coupled with some BEV vehicles having a short range of fewer than 100 miles, can lead to “range anxiety.” This, in turn, can make a BEV vehicle a less valuable option for customers.

A short track record of BEV sales also makes it harder to predict residual value, since the sample size is too small to be statistically significant. BEV sales volumes have been historically low, with sales in the U.S. slightly exceeding 87,000 units in 2016, or 0.6% of total new vehicle sales of that year. That said, hybrid resale data present a good, “if imperfect,” proxy for EVs, according to the report. And, although BEV-backed leases have been only a very small portion of ABS pools, the BEV market and BEV financing market is expected to continue growing, Moody’s wrote.

Finally, the third issue impacting BEV residuals is the technology behind the battery. Batteries account for roughly 30% to 40% of a BEV’s cost. “Therefore, improvements in battery technology that cannot be applied to older models would reduce contemporary BEVs’ residual values by making the costs of new BEVs lower and more appealing to consumers,” Moody’s wrote.