LONG-TERM, LEASING battery PACKS WILL MAKE A LOT OF SENSE FOR BUSINESSES THAT ARE ABLE TO PUT THE PACKS ON THE ROAD (or on the factory floor) FOR A BIG PART OF THE DAY.
Leasing serves an important role in business. Items that are leased are usually items that wear out or become obsolete after a few years and require continued maintenance to remain functional. Think of tires for buses and copiers for offices—two items that are commonly leased.
Certain things used to be leased, such as computers, but as computers became more reliable and less expensive, they were moved into the ‘purchase’ category, along with staplers and office chairs.
The big benefit with leasing is that it takes a potentially unpredictable annual expense and converts it into a predictable monthly expense, which is something businesses like. And if the item requires periodic maintenance to keep it running, then leasing looks even more attractive because the service can be part of the lease.
In the end, businesses will opt to pay a slight premium each month in order to make the unpredictable predictable.
Leasing for consumers is generally a different calculation. In most cases, consumers prefer to buy and shoulder more uncertainty, simply because it's cheaper. People could lease a hot water heater with service and have it replaced within 8 hours when it fails after 15 years. But it’s much cheaper to purchase the hot water heater and deal with the 2-3 days of inconvenience when it ultimately does fail.
The Time and Utility Factor
The case for leasing is easy to make when the asset is heavily used over a very short period of time. Think of a copier that is used in a very high-volume printing shop. The printing shop needs to minimize the cost per page to stay competitive, and so they need to update their printing technology more often to keep that edge. They also want service personnel on-call to reduce down time. In this case, leasing makes a lot of sense: You lease a state-of-art copier for 2 years, beat it to death, and replace it as soon as the technology advances.
But for the person who makes a few copies a day, buying a copier that will hopefully last 10 years will be much, much cheaper.
Batteries might seem to be a unique item for which a buy/lease template doesn’t exist. And in fact, Renault and others have experimented with leasing for consumers, with much of the consumer demand initially stemming from the concern that the battery was very expensive and might fail early on, sticking the consumer with a large and unexpected expense just 3 years into the new car ownership.
But as manufacturers have demonstrated increasing reliability with EV batteries (and backed the batteries with impressive warranties), and as pack prices have continued their free fall, consumers have again shifted towards maximizing value. Renault remains the most prominent example of a car maker leasing the pack to the consumer (they have ~100,000 consumers on pack lease plans). Below we can see the price of the car in the UK with the battery included as part of the purchase:
And here we see the price of the car with the battery leased:
In the case of the Expression I listed above, we see price of the car is reduced by £4800 ($6500) if you accept a lease that runs about $100/month ($66 to $120, depending on the annual mileage). After 65 months, you hit the break-even point between whether it's cheaper to lease or buy--with longer holding periods favoring purchase. The crossover comes sooner if you drive a lot, and later if you drive a little. But beyond this break-even point, you are overpaying to lease. In the most generous bucket, you pay about $120/month ($1440 annually) for 10,500 miles of use. This is roughly $0.14 per mile cost (no electricity). In the smallest bucket, you pay about $0.18 per mile. Compare this with the previously computed figure for the much-more-impressive Model 3 of $0.08/mile (no electricity) and you can get a feel for the premiums leasing puts on operating costs: Leasing a battery dramatically increases your per-mile operating costs. But for many consumers, that might be worth it especially if they don't plan on using the car a lot or if they only need the car for a few years. However it tends to negate one of the bigger benefit of electric vehicles, which is the per-mile operating costs.
The worst decision is a long-term lease. That puts your per-mile costs far above the purchase option. And it's an odd decision to make because the battery could easily have been financed as part of the purchase price. A $6500 battery at 4% for 5 years is about $125/month, just a few dollars more per month than leasing.
One of the biggest drivers of leasing costs is the fact that the manufacturer needs to make money on the asset whether you use it or not. This is clear in the leasing agreements: A car that sits in the garage 24 hours a day in the dreary days of winter still carries a big monthly lease fee, which reflects the constantly deteriorating value on the asset. Two things need to happen for leased per-mile costs to fall. First, the car needs to be on the road a lot. This is what Tesla is achieving with the Semi. Second, more choices need to arrive. The market today is nascent, and not everyone is putting their best foot forward in terms of competitiveness as they explore the various markets.
Long term, those that succeed at making money from leasing batteries will be those companies that can demonstrate their assets are being used for a large chunk of the day—just like a company that leases copiers. A lithium-ion battery can have a very high utilization rate (aka time on the road): 2 hours of operation at 0.25C (55% capacity down to 5% capacity), followed by 20 minutes of ~1.5C fast charging to get back to 55% (fast charging can’t be done as the battery SOC gets above 50%). That means an asset could be in use for 120 minutes out of 140 minutes—86% of the day, 24x7. Tesla’s Semi looks to be around the 40% utilization mark when driven by a human for a single shift. When full autonomy arrives in the future, that figure could theoretically double. Driverless trucks will travel down the freeway, slingshoting themselves from supercharger to supercharger, aiming to arrive nearly empty and charging to just over half full in order to maximize up-time on the asset. With the claimed 30 minutes of charging delivering 400 miles of driving (roughly 5.7 hours of driving), Tesla seems to be telegraphing that they could have autonomous trucks on the road for as much as 90% of the day. Impressive. And precisely the type of application that wants to be leased.
Next time, we’ll take a look at the math behind lease-versus-buy on scooter batteries.