Customer is King – Positioning the Consumer at the Centre of a Unitary Policy Framework for New Energy Vehicles

In the first article, we explored the local and global factors that make it imperative for South Africa to adopt and implement a coherent and unified policy to facilitate the transition to New Energy Vehicles (NEVs), thereby avoiding a reactive position instead of a strategic one.  We also touched on the fact that the government has made significant strides in creating an enabling environment for automotive manufacturers.  In this instalment, we focus on the consumer-facing aspects, which are critical as a tool to drive demand for NEVs and consider policy measures that the government can incorporate into its unitary policy to place consumers at the centre of the NEV transition. 

South African Automotive Consumers

The South African consumer landscape is made up of various players, all of whom need to be taken into consideration in any policy design, including:

1. Freight and Logistics operators.
2. Public transport operators.
3. Ride-hailing industry.
4. Last mile delivery;and
5. Individual consumers.

The primary concerns of consumers regarding NEVs relate to purchase price, total cost of ownership, electricity availability, range anxiety, and charging infrastructure.  Whilst demand is rising in the e-hailing and individual consumer space, there has been little to no NEV uptake in the commercial truck and bus and minibus taxi sectors, with only a few commercial trials being reported. 

Challenges with Stimulating Local Demand

These challenges are not particularly unique to South Africa.  In other countries, the authorities have adopted the policy approach of using a mix of various incentives such as –

• tax incentives through reductions in import duties, value-added tax (VAT) exemptions, or income tax deductions for electric vehicle purchases;
• rebates or grants that provide financial support to consumers who purchase electric vehicles, making the purchase price more affordable;
• funding and support for expanding EV charging infrastructure (public, home, rank, and depot charging stations);
• stricter emissions standards for internal combustion engine (ICE) vehicles, encouraging consumers to opt for cleaner alternatives; and
• funding local research and development initiatives focused on electric vehicle technology and battery manufacturing.

India has been actively promoting the uptake of EVs, including through the flagship Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme, which aims to do this primarily through the provision of fiscal incentives to EV buyers across all consumer segments.  In Brazil, there are several laws and regulations on tax incentives for EVs at federal, state and municipal level including federal tax and import tariff exemptions for EVs.  Australia also has a mix of federal and state incentives, customs duty exemptions, and rebates on NEVs. 

Whilst the challenges are similar, the South African automotive consumer market has several unique characteristics that make wholesale adoption of these comparative approaches difficult, which include the –

• lack of confidence in the electricity grid and high cost of installing independent power supply;
• impact of NEV incentives on government’s ability to deliver on welfare programmes;
• relatively low availability of cheap capital for investments in charging infrastructure; and
• slow pace of private sector investment in local research and development and production of NEVs that are more suited to our operating environment.

Suggestions to Overcome South Africa’s Unique Challenges

The government is investing a lot of money and effort to stabilise the electricity grid.  Whether or not these initiatives succeed in rebuilding consumer confidence in the electricity supply is a question of time.  In any unitary NEV policy framework, the government must provide a plausible account of its plans to accommodate the increased electricity demand that comes with mass adoption of NEVs. 

In an acknowledgment of the limitations of the electricity grid to meet present demand, the government announced renewable energy-related tax incentives in February 2023 through amendments to the Income Tax Act 58 of 1962 (“Income Tax Act”) that, amongst other things, allow qualifying businesses to claim 125% of costs incurred in respect of qualifying investments in green-energy electricity generation projects for their own consumption.  This is limited to investments brought into use for the first time between 1 March 2023 and 28 February 2025, to stimulate investment in the short term.  A unitary policy framework on NEVs should incorporate a longer-term incentive for NEV-related green energy electricity generation projects, as well as additional incentives for the installation of EV charging infrastructure. 

A research and development incentive (“RDI”) was introduced in section 11D of the Income Tax Act in 2006, which allows a deduction equal to 150% of expenditure incurred directly for research and development and an accelerated depreciation deduction for capital expenditure incurred on machinery or plant used for research and development.  The authority to approve RDI applications vests in the Minister of Science and Technology, after review by and on the recommendation of, the R&D Adjudication Committee.  A unitary NEV policy framework must include predetermined details of qualifying criteria for NEV research and development projects, to accelerate investment in the development of NEV products that are attractive to all consumer segments. 

It is apparent that NEV prices are still too high for mass-market adoption, but the government has not yet tabled or implemented widespread incentives or government rebates specifically targeted at NEVs.  In January 2024, Ebrahim Patel the incumbent Minister of Trade, Industry and Competition, was quoted as saying that duties on EVs (which are at 25%) would not be reduced in the short-term.  Several senior executives of South African automotive manufacturers have made calls for the government to introduce subsidies for NEVs.  The independent research institute, Trade Policy Research Strategies (“TIPS”), proposes in its Policy Brief 3/2022 titled Towards an Inclusive Roll out of Electric Vehicles in South Africa that the South African government implement subsidies as outlined in the table below:

Proposed subsidies

Recognizing the relative success of incentives and rebates to accelerate NEV demand in other countries by reducing the price gap between NEVs and ICE vehicles, we posit that a unitary NEV policy framework must include similar policy positions.

Consumer range anxiety can be mitigated by adopting an aggressive first transition step to drive the adoption of Hybrid Battery Electric Vehicles (“HBEVs”), which are ICE vehicles that have a supplementary self-charging electric motor.  The current sales statistics reflected in the table below show consumer preference for HBEVs, probably because they offer greater range performance.  

The South African consumer environment lends itself to the adoption of HBEVs and, as such, the NEV policy framework needs to provide aggressive incentives to speed up HBEV adoption with a view to eventually transcending to full BEVs.

Conclusion

Consumers are at the centre of the NEV transition and, as such, specific policy focus must be placed on enhancing their interests.  Seeing as the proverbial writing is on the wall regarding the inevitability of the transition to NEVs, the government needs to conduct widespread engagements with stakeholders in each consumer segment to design policy positions that will have the desired effect to stimulate demand for NEV products that are relevant to each consumer segment.  Our high-level recommendations in this regard are as follows: 

• Continue to strengthen public confidence in the electricity grid stability and the ability of the planned future energy mix to meet increased energy demands.
• Enhance existing tax incentives for self-consumption electricity generation projects by adding a specific category for projects linked to EV charging. 
• Provide new tax incentives and attract funding for the construction of public EV charging infrastructure.
• Implement fiscal incentives (customs exemptions, tax rebates, and subsidies etc) to make NEVs (and especially HBEVs) more affordable and/or competitive against ICE vehicles. 
• Stipulating specific qualifying criteria and tailor the existing tax incentive for R&D within the NEV sector.
• Provide a framework to improve the availability and deployment of investment in research into NEV products and components that suit the local environment.

In the next instalment, we will drill into the policy imperative to balance the strategic goal of transitioning to NEVs with the impact on the petroleum industry.