As cities globally take action to electrify urban logistics, the goals and timelines are clear: a consensus has emerged among first-mover cities to fully electrify logistics by 2030–2035. However, the pathway there is not known; the world has never seen a fully electrified urban logistics system. Each city will follow its own path to logistics electrification and have a different set of tools at its disposal. Looking to Shenzhen, which is furthest along the pathway to full logistics electrification with an ELV fleet of more than 70,000 vehicles, may help make the journey for other cities smoother. Over the past five years, Shenzhen has rapidly developed its market for electric logistics vehicles (ELVs) and has emerged as a global leader in logistics electrification.
Over the past three years, Rocky Mountain Institute (RMI) has worked with Shenzhen to better understand how logistics electrification has played out in the city and to suggest refinements to the approaches of the public and private sector to sustain and accelerate that process. This article is an extract from the summary of the report series Putting Electric Logistics Vehicles to Work in Shenzhen by RMI. In this series of reports, RMI has focused on four critical aspects of logistics electrification: policy, infrastructure, vehicle capabilities, and vehicle ownership models.
Policy
While unsubsidized ELVs are projected to achieve TCO parity with ICE competitors in the next several years, the market is not yet mature enough to succeed on its own. At this stage, urban logistics electrification still needs policy support. Cities have multiple options for how to provide such support and an effective policy portfolio must deploy all of those options: first is enhancing ELV cost competitiveness through subsidization of the vehicle, second is through reducing the value proposition of ICE vehicles through access restrictions such as low- or zero-emissions zones, third is accelerating charging infrastructure build-out through subsidization of capital cost, and fourth is through enhancing ELVs’ existing operating cost advantages through preferential electricity rates or taxes on fossil fuels.
By changing the value proposition of ELVs’ relative to ICE vehicles, and simultaneously ensuring that a suitable ELV charging infrastructure system emerges, cities can achieve rapid growth in ELV fleets. This will bring both reduced carbon emissions and cleaner air. And while policymaking is an important element to ELV fleet growth, it cannot be static. A broad array of policies such as urban entry restrictions, vehicle subsidies, and fuel subsidies can create a complex incentive structure for logistics companies that respond by optimizing their vehicle use patterns in unexpected ways. For example, in Shenzhen, policymakers were initially focused on growing the fleet, which they accomplished through generous purchase incentives combined with city entry restrictions. However, because those ELVs were very cheap and provided the option for easier access to the city center but were oftentimes not suitable for more challenging routes, they were used as supplements, rather than replacements for ICE vehicles.
This was particularly severe for light trucks, which typically operated outside of the city core and were less affected by entry restrictions than vans. As a result, Shenzhen was left with a large, but at times poorly utilized, ELV fleet. This was especially true for light-duty trucks. Policymakers had to understand the root causes of that poor utilization and adjust accordingly, which led them to reevaluate both how vehicles were being subsidized along with how charging infrastructure was being deployed.
In 2019, policymakers in Shenzhen were confronted with both the problem of low utilization as well as the winding down of the purchase subsidy framework that had driven ELV purchases earlier in the decade. Knowing that ELVs were not yet capable of competing with ICE vehicles on cost alone, but also knowing that purchase subsidies had not yielded sufficient return on the subsidy funds due to low vehicle utilization, Shenzhen introduced the operational subsidy. This subsidy was roughly equal to the discontinued purchase subsidy in terms of money available to an ELV purchaser. However, payments were divided into three installments and paid annually only to vehicle owners who had met the utilization threshold of 15,000 km driven per year. While this did not alter the overall per-mile cost of ELVs for qualified vehicles, it did alter the daily decision of what vehicle an operator chose for a given route to ensure that the vehicle qualified for the subsidy. This in turn made it less likely that ELVs play a supplementary role to ICE vehicles in daily dispatch.
At the same time, Shenzhen began to research and implement charging infrastructure planning approaches that would support ELV use, rather than assuming that all logistics vehicles would be able to charge at night at the depot. By focusing on making fast charging available to logistics users, especially owner operators and small businesses that did not have reliable access to a self-owned parking spot in which they could install a charger, Shenzhen was able to expand ELV use into new market segments. As a result of this shift in policy portfolio, utilization rates of ELVs in Shenzhen improved markedly in 2019, which reduced CO2 emissions by 27,000 tons and particulate matter by 1.2 tons compared with 2018.
Infrastructure
In tandem with its investment in a very large fleet of electric vehicles for both freight and passenger applications, Shenzhen also invested heavily in the charging infrastructure necessary to effectively provide those vehicles with energy. Those investments came primarily in the form of financial incentives to the construction and use of charging infrastructure. The key elements of that policy package were up-front subsidies to install infrastructure, preferential electricity rates including access to industrial tariffs, and exemption from demand charges for large-scale charging stations. Regulated services fees collectible by charging station operators that capped electricity prices to vehicles were also important. Collectively, this policy portfolio invested substantial government capital into charging infrastructure build-out and ensured low priced electricity was available to vehicles. It did this while enabling adequate, but not monopolistic, returns to private-sector companies that installed the infrastructure.
This policy, along with burgeoning demand from the rapidly growing EV fleet in Shenzhen, led to rapid growth in charging infrastructure in Shenzhen. However, that growth was not without problems. In the initial stages of infrastructure build-out, many small companies competed to build up charging networks, leading to a highly fragmented charging network that was often unreliable and unevenly maintained. As a response to this, Shenzhen restricted incentives only to companies that were able to invest in charging infrastructure at significant scale. This ultimately led to a network in which vehicle users expressed high levels of confidence and satisfaction.
Furthermore, initial rounds of infrastructure deployment were not always in line with the needs of vehicles, especially logistics vehicles, both in terms of location as well as type of chargers. In the early stages of infrastructure deployment in Shenzhen, the assumption from the city was that logistics vehicles would be charged at the depot, overnight, through slow charging with a capacity of 3–7 kilowatts. This assumption held true for early deployments by large fleets with predictable routes and land to install chargers. Most charging events occurring at logistics facilities were vehicles that plugged into slow chargers after a day’s work. However, as the market grew, this assumption quickly became obsolete. Small-scale players with flexible routes and no land to install chargers began to purchase and use ELVs. And as fleets increasingly relied on ELVs as core generators of value, they began to benchmark their charging times against fueling times of ICE vehicles. This led to massive demand for fast charging in the ELV market. Between 2018 and 2019 almost every new vehicle that reported data to China’s National EV Data Platform, which is the source of all EV data in these reports, exclusively used fast charging.
The result was a pattern of charging demand that was not originally contemplated by policymakers: heavy use of public fast charging by logistics vehicles. Far different from expectations, in 2019 nearly half of all energy used to charge ELVs was from public charging stations and nearly 70% of energy dispensed to vehicles was from public and private fast charging. As a result of this preference for fast charging among ELVs (and other commercial vehicles), Shenzhen shifted its approach. First it implicitly included ELVs in public infrastructure planning and strove to resolve existing imbalances between the distribution of public charging and the distribution of charging demand from logistics users. Second, it focused on the installation of very large charging hubs capable of serving dozens or even hundreds of vehicles at once over smaller stations.
Vehicle capabilities and quality
Infrastructure deployment, combined with the new operational subsidy, has driven vehicle utilization. Meanwhile, vehicle capabilities as a constraint on further electrification of urban logistics in Shenzhen have become an increasing area of focus. Specifically, with ELVs now widely expected to fully replace ICE vehicles in urban logistics in Shenzhen, users are demanding ICE-like performance from their ELVs. This has caused Shenzhen headaches in two major areas. The first is ELVs’ ability to effectively perform in demanding conditions such as on long distance routes, hauling heavy, dense freight, or hauling specialized freight like refrigerated goods. While heavy, dense freight and refrigerated goods transport are areas where operators have expressed significant concerns about ELVs, those types of freight are a relatively small share of overall deliveries. However, concerns over vehicle range are significant.
Furthermore, as operators hold ICE vehicles in reserve for routes that ELVs may not be able to reliably complete, they also hold the option to opportunistically use them, creating a barrier to full replacement of ICE vehicles by ELVs.
The second vehicle performance concern is in vehicle useful life and battery degradation. As both Shenzhen policy and fleets push for high vehicle utilization, fast charging is increasingly becoming the norm. This has increased the flexibility and uptime of ELVs, and the widespread availability of public fast charging has increased operator confidence in the vehicles. However, it has also led to an unacceptably rapid loss of vehicle range for both minivans and light trucks.
This relatively fast battery degradation, and the resultant difficulty selling vehicles into the second-hand market, was the most cited quality and performance issue with ELVs in our research. For ELVs in Shenzhen to fully replace ICE vehicles in urban delivery, the issue of range and its degradation over the life of a vehicle must be resolved.
Furthermore, fleets typically purchase vehicles that can serve in all conditions, not only favorable ones. As other cities grow their fleets, keeping in mind how ELVs can meet not only the relatively easy demands of vehicle operators but also the more difficult ones will be important for scaled adoption. Cities must also consider what role policy and infrastructure can play in enhancing vehicle reliability.
Ownership models
A notable feature of the ELV market in Shenzhen is the prevalence of leasing rather than vehicle ownership, which is how more than 95% of ELVs are acquired by operators. Short-term leasing models, with contracts as short as one month, have been critical for enabling operators to adopt ELVs with confidence. There are three major reasons that operators choose to lease, rather than to purchase, ELVs. The first is the lack of a strong supporting ecosystem of maintenance and refueling for ELVs. Individual vehicle operators cannot build up maintenance and charging systems themselves, but leasing companies, which own thousands of vehicles, can. Once leasing companies establish these systems, they can provide them to customers as an overall package when leasing the vehicle.
The second is the cost structure of vehicles. Vehicle operators often have little or no access to credit. However, leasing companies often have strong balance sheets and are able to finance the high up-front cost of vehicles at relatively low rates. They also have the ability to maximize vehicle utilization, taking advantage of the low operating cost advantages of ELVs. The third is policy preference for large-scale vehicle owners.
For ELVs the electricity distribution network often requires substantial upgrades to accommodate charging, and chargers themselves must be installed. Additionally, many EV OEMs are startups with immature supply chains for vehicles and parts and there is limited expertise in the specialized maintenance needs of ELVs. This lack of a robust existing ecosystem to support the operation and maintenance of ELVs makes operators reluctant to make a long-term commitment to vehicle ownership and instead lease vehicles. Leasing ELVs also makes sense due to their high up-front cost and low operating costs. Most logistics firms, especially small and medium enterprises (SMEs), typically have poor access to capital and their borrowing costs to purchase vehicles are high. This can lead them to favor vehicles with a low up-front cost and high operating costs.
Leasing companies, on the other hand, are often much larger and have access to much cheaper financing than SMEs. At the same time, low operating costs reward vehicle owners who are able to maximize utilization of vehicles. While any given vehicle operator is exposed to seasonality and random fluctuations in demand, leasing companies can dynamically move vehicles among customers to smooth out those fluctuations over a diversified client base to obtain strong utilization of the entire fleet.
While the preference for leasing ELVs in the growth stage of the market in Shenzhen has been extremely strong, it should not be taken for granted that such dominance will persist indefinitely. Leasing does add a layer of cost and intermediation, and the supporting ecosystem for ELVs will grow out as they become the main vehicle for urban delivery. This suggests that in certain circumstances owners, especially large firms with low financing costs and predictable use patterns, may elect to own ELVs rather than lease them.
Indeed, in the relatively small instances where ELVs are not leased in Shenzhen, it is typically large-scale e-commerce firms that use them for the most predictable elements of their delivery activities. These firms still lease ELVs for the less predictable and more seasonal elements of their business. With this in mind, there is a possibility that leasing may lose some market share in the future. However, given the cost dynamics, leasing ELVs is likely to remain more common than leasing ICE vehicles.
While contractual arrangements for the ownership and use of a vehicle are best left to the private sector to navigate, cities can play a role in facilitating the emergence of such models. First and foremost, cities can look at existing policy portfolios and ensure that regulation is not unintentionally inhibiting the emergence of ownership models that are supportive of ELV adoption. Beyond this passive role of doing no harm, cities can also play an active role. Through their economic development agencies, cities can proactively engage with providers of innovative ELV ownership models to attract them to the city and facilitate their working with local delivery businesses and logistics firms.
Takeaways for cities globally
Policy, infrastructure, vehicle performance, and ownership are not independent. In fact, those four worlds all collide in the costliest component of an ELV: its battery. The greatest source of ELV failure is battery degradation, and one of the main reasons that the leasing model has come to dominate in Shenzhen is the cost of the battery pack and fear that rapid degradation of the battery will render an expensive purchase useless in a short amount of time. However, the main reason for battery degradation is a quest for high utilization enabled by fast charging. Both the emergence of fast charging and the quest for utilization in Shenzhen were the result of rational choices by vehicle owners, but ones made in a specific policy context that provided ample fast charging and explicitly rewarded high utilization. Both the operational subsidy and the massive deployment of fast chargers were policy moves that supported the emergence of the ELV market as it exists today in Shenzhen.
However, how to deal with a large stock of ELVs with highly degraded batteries for which no second-hand market exists remains a looming issue for Shenzhen. The pathway to resolving this issue is likely to be a two-pronged strategy that focuses on enabling second-life battery business models, such as stationary storage, while rapidly developing battery chemistries and charge management systems that can handle a decade of fast charging.
Each city has its own individual circumstances and each city’s policymakers have different toolboxes that they can use to drive logistics electrification. Therefore, it is not reasonable to expect any city to follow Shenzhen’s exact path. That path was a product of what the city needed and what city policymakers had the authority to do. However, there are several high-level takeaways that can be useful to all cities.
- Full logistics electrification is possible
- Focus first on electrifying the simple use cases
- Policy must evolve as logistics electrification progresses
- Policymakers must create the capabilities to understand and evaluate the ELV market
- Growing an ELV fleet is a necessary but insufficient condition for logistics electrification
- Coordination with other jurisdictions is necessary for a successful policy portfolio
- Infrastructure is the key enabler of logistics electrification, but choices in infrastructure have far-reaching consequences
- Encourage innovation and entrepreneurialism in the supporting ecosystem
As cities seek to chart their own pathways to full logistics and transport electrification, they can benefit from Shenzhen’s experience. Specifically, they can evaluate the systemic effects of policy and infrastructure choices and ensure that both the technical attributes of EVs they deploy as well as the business and ownership models for those EVs are suitable to the policy and infrastructure decisions they make.
The entire report can be accessed here
