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EV subsidy cut was inevitable despite industry ‘outrage’

The car industry's self-serving howling at today's cut in the plug-in car grant was predictable, but what does it mean for car buyers?

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The car industry’s predictable and self-serving opposition to yesterday’s reduction in the plug-in car grant was to be expected, but what does it mean for the average consumer?

In case you missed the news, the government has announced that – effective immediately – the taxpayer subsidy on electric cars is being reduced by £500, from £3,000 to £2,500. It will also now only be available to cars priced under £35,000, compared to the previous limit of £50,000.

Car industry spokesfolks have howled with indignation, as they always do. In reality, the government is simply doing exactly what it has always said it was going to do, and this is just the latest of several cuts to the plug-in car grant in recent years. The only real surprise was that the reduction is effective immediately, rather than setting a start date of 1 April or 1 May.

What’s important to note is that the overall pot of money for electric cars is not being reduced, just retargeted. The government has chosen to spread its money a bit thinner and target lower-priced electric cars, which is not that surprising given the strong growth in electric car sales.

In 2020, overall new car registrations fell by about 30% compared to 2019. Yet electric car registrations went up by more than 185% – almost a threefold increase. Clearly the demand for electric cars is growing strongly, not falling. This suggests the government is right to assume that this latest move is unlikely to harm new EV sales.

How will this cut affect car buyers?

Well, if you’re buying a new Vauxhall Corsa-e on a four-year PCP or equivalent lease, it will cost you about a tenner a month more today than it did a couple of days ago – and that’s if Vauxhall does nothing to mitigate the £500 net price increase. Alternatively, you can keep your monthly payments the same and pay an extra £500 deposit up front. So if you were already planning to buy an EV that costs less than £35K, this news is unlikely to sway your decision.

On the other hand, if you were planning to buy a £35-50K electric car, like a Tesla Model 3 or a Polestar 2 or a Mercedes-Benz EQA, yesterday’s news may well cause you to pause for thought. Over the same four-year period, you’ll have to pay more than £60 extra each month – or cough up an extra £3K up front – unless the car manufacturers reduce their prices (and, historically, they magically tend to do so when government incentives disappear so we’ll see what happens).

But in the real world, there is currently a much bigger problem for the economics of switching to an electric car…

The white elephant on the driveway

The biggest economic factor working against electric cars right now is our old friend Covid-19.

Most households have driven much less than usual in the last 12 months, as people have been working from home and doing a lot less travel outside work. According to this month’s MOT report, my own car covered just 1,000 miles in the last year, compared to a usual 7,000 miles a year pre-pandemic, and millions of UK households will have been in a similar position.

Low mileage is a killer for electric car economics. You pay a lot more to buy an EV and then hope to save enough on your running costs to offset the price of the car. But if your electric car has been largely sitting on your driveway for a year, your economic plans have gone completely out the window – by far more than any amount of government subsidy.

Given that a return to normal driving may still be months away for most people, this is what should really be causing car buyers to reconsider whether they want an electric car right now.

The fact that electric car sales have grown so significantly during a year of national lockdowns suggests that the public’s desire to have an electric car on the driveway is stronger than their economic sensibility. So why should the government keep subsidising what is already in demand?

Supporting affordable cars makes sense

Continuing to support more affordable models is far more important than supporting high-end cars, as this is where the government can genuinely help the largest number of people make the switch from fossil fuel to electricity. Even with a massive subsidy, an electric Vauxhall Corsa-e’s starting price is still £10,000 more than the starting price for a petrol Corsa.

On the other hand, is it really the best use of government funds at a time of financial crisis to subsidise the cost of a £50K luxury electric car for people who have that much to spend on a new set of wheels? The government is banking that the general public will agree with this decision.

One last thought

Incidentally, how did the government arrive at the new £35K limit? Well, it probably doesn’t hurt that this precise number means that the two UK-built electric cars – the Nissan Leaf and Mini Electric – both slide under this threshold so they’ll still be eligible for the subsidy…

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Stuart Masson
Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.