Are we seeing a U-turn over the 2035 ICE ban?

The news last week that an agreement had been reached between the European Commission, Germany and other interested parties who had raised last minute protests about the ICE ban from 2035, might be interpreted as a U-turn.  As I'm sure you are well aware, within the EU and aligned states such as Norway and the UK, we have been working for some years on the basis that ICE cars could no longer be legally sold new from 2035 (in some states earlier) with only a very limited exception for manufacturers selling less than 1000 cars annually.  This very limited exception would not even cover manufacturers like Ferrari or Lamborghini both of whom produce several times that volume, and the very small niche manufacturers rely on bought-in powertrain, so we all thought that we were looking at a purely electrified future, whether that be battery electric vehicles (BEVs) or fuel cell electric vehicles (FCEVs).

At the start of this month, Volker Wissing, the German transport minister, stepped in with a last minute objection, doubtless fuelled by intense lobbying behind the scenes from German manufacturers, that there should be an allowance for new cars to continue to be available if they are powered by carbon neutral e-fuels.  Some other south and east European Governments then joined the objectors, notably Italy who favour a wider relaxation to include a broader range of biofuels, not all of which are carbon neutral over the full life cycle.  The agreement that was reached last week will amend the regulations to allow new cars to continue to be sold after 2035 as long as they can only be powered by carbon neutral e-fuels.  Exactly how this will be achieved technically is not yet clear and the detailed changes to the regulations are not yet drafted and will not be available for some months. The key question is whether this really changes anything in terms of the direction that the industry is now heading and has been for a few years?

As things stand, e-fuels cost around twice as much per litre as petrol or diesel, with the likelihood this will reduce over time due to both technical improvements and economies of scale.  If there was widespread take-up of the fuels which some suggest could happen as a result of a parallel policy of blending fossil fuel and e-fuel, potentially for use across the existing parc of ICEs, then subject to the necessary investment volumes could ramp up relatively quickly, driving costs down.  However, this would require another piece of legislation to set a policy of using e-fuels rather than ethanol in regular petrol.  Although this is logical, I have seen nothing that suggests this is on the agenda of politicians or regulators.

In addition, there will be similar technology and scale effects on the production cost of BEVs and FCEVs making them more affordable.  There is still uncertainty around energy prices in general and how EVs are taxed, but it seems a reasonable assumption that the total cost of ownership will trend downwards from the current elevated levels in real terms.  This means that e-fuels may still be the premium option in terms of total cost of ownership.  Not maybe relevant for the Porsche owner or for someone living in a remote area where lack of charging or hydrogen infrastructure means that an ICE car is the only viable option for the foreseeable future, but it does not appear to be a lifeline for entry level city cars unless there is a dramatic breakthrough.

Manufacturers are now faced with a dilemma – whether to maintain ICE development and manufacturing capability in order to capture those customer segments who reject any type of EV and are prepared to pay the likely premium for e-fuels.  With a requirement in Europe that to qualify post 2035 any ICE must only be capable of running on e-fuels, this might imply limited overlap with the development and manufacturing of ICEs for other markets.  For dealers and repairers who are working on plans to adapt their businesses to survive with only BEV new car sales and a declining aftermarket, the prospect of some level of continuing ICE new car sales post-2035 might sound like some sort of lifeline, but the reality in my view is that it will be highly brand dependent and still a relatively small part of the mix.

Those of us who are petrolheads will welcome the possibility that we can continue to hear a Porsche flat 6 or a Ferrari V12 for real as opposed to some synthesised interpretation of that applied to an electric motor.  However, from a business perspective, planning on the assumption of 100% EV at 2035 remains the sensible choice.