Earlier this year, President Obama announced an agreement with 13 top automakers to drastically increase the corporate average fuel economy (CAFE) standards for cars and light trucks by 2025. The SmartVan spoke with Mike Antich, industry expert and editor of Automotive Fleet, to get his thoughts.
Explain the new rules and what they mean for fleets.
The new rules will require the corporate average fuel economy (CAFE) standards for cars and light trucks to increase to 54.5 mpg by 2025. From 2017-2021 there will be a gradual incremental year-by-year increase in fuel economy average, which will allow original equipment manufacturers (OEM) time to achieve the 2025 standards. For cars, this will be a 4.1 percent year-by-year increase annually in fuel economy and for trucks it will be a 2.9 percent annual increase. Additionally, the government has created the rules in a way to incentivize OEMs to introduce different types of vehicles via an “incentive multiplier.” This means that certain vehicles during the model years 2017-2021 will count as more than one vehicle towards meeting the goal. For instance, if I’m producing an electric vehicle or a fuel cell vehicle, they would count as two vehicles instead of one towards meeting this goal. Starting in 2021, that percentage decreases to 1.5. After 2025, the incentive could be modified but based on the direction the government is encouraging the industry to go, I’d be very surprised if they eliminated those incentive multipliers.
What kind of costs are fleets going to face? How long will they be in the red before fuel savings from new vehicles recoups the cost of a new fleet?
This will vary by the type of vehicle. Costs and specifically acquisition costs will increase. Everybody is in agreement on that. Even the government says acquisition costs will increase because it will require the manufactures to adopt new technologies, lightweight materials or modifications with existing engine technology to optimize fuel economy. The amount that will increase, however, is a subject for a debate. The government argues that the acquisition costs will be offset by the decreased fuel costs over the life of the vehicle. Costs will vary if you’re looking at SUVs, compact cars, full-sized vans or hybrids.
Are OEMs prepared for the new fuel economy standards?
Currently there are no OEMs in the world that can meet these proposed CAFE standards. Right now there are only seven models sold in the United States that get over 39 mpg. The government is pushing OEMs to look for alternative technologies, which is why it’s created the incentive multiplier – it’s a built-in encouragement for OEMs to develop these new types of vehicles and you’re already starting to see it now. All of the manufacturers have announced that they will be introducing electric type vehicles in the future. I think there will be a greater availability of those types of vehicles, I believe there’s going to be pressure on manufacturers to sell more of those types of vehicles and they will be incentivizing them for sales.
We’re right at the beginning of this proverbial starting line. All vehicle manufacturers are in the same ballpark. Vehicles aren’t developed overnight. With the new standards, it creates a further impetus for the OEMs to start moving in that direction. There are substantial penalties administered by the U.S government associated with not meeting these standards. They’re not toothless mandates.
Service fleets have been slow to adopt hybrids and electric vehicles. How will an uptick in the manufacturing of these types of vehicles affect fleets?
One of the reasons why service fleets have purchased so few hybrid vehicles is because of the limitations to the types of classes of hybrids. Not all of the current classes of vehicles that use hybrid and electric technology can fulfill all fleet application. Until you get diversity in the types of hybrid vehicle classes that are available, there are limitations to the types of fleet applications where they can be used.
Sale of hybrids in the fleet market is much easier in my opinion than selling them on a onesy-twosy basis to the retail market. Fleets buy in quantity, manufacturers can add incentives to decrease overall acquisition costs and, as studies have shown, acquisition price is the No .1 factor in determining the types of vehicles that are acquired by fleets.
You wrote that the new CAFE standards will create a “hybridization” of fleets. Why do you see OEMs and businesses gravitating towards hybrids instead of more fuel-efficient all-gas vehicles?
It goes back to the federal government’s incentive multiplier approach, where hybrids are counted as two vehicles instead of one from 2017-2021. Also, the greater availability of hybrids within an OEM portfolio and diversifying of vehicle classes of hybrids will make them more appealing to individual fleets.
There will also be a generational change within the next 14 year period that will start seeing a new demographic of drivers emerging who will have a greater receptivity to hybrids and alternative technology.