Plug-in hybrids give automakers an emissions compliance lifeline

Automakers in Europe fear a lukewarm consumer response to the fleet of electric vehicles they are preparing to launch to comply with tougher emissions regulations, but they do have one lifeline: the plug-in hybrid electric vehicle.

The PHEV is in some respects an almost magical vehicle. Adding a battery and electric motor to a conventionally powered vehicle preserves most of the usability that consumers know while also allowing the automaker to reduce CO2 output by between 50 percent and 80 percent.

Because of the way emissions are calculated, PHEVs are easily capable of recording a CO2 figure of below 50 grams per kilometer. That means their sales will not only help reduce automakers' average CO2 when the 95g/km average kicks in next year, they also count as so-called "supercredit" sales until 2023, letting automakers offset purchases of their higher-emissions cars.

On top of all that, the PHEV also qualifies for various tax incentives and purchase grants within numerous EU countries. In addition, they qualify for entry into many cities' ultra-low emissions zones, where conventional vehicles will be banned from entering.

But there are also huge pitfalls for automakers relying on PHEVs. Most worrying is the potential backlash among environmental groups, city mayors and ruling governments if they decide that PHEVs are nowhere near as green as the stated CO2 figure claims.

"The climate credentials of plug-in hybrids are directly proportional to how much they drive on their electric motor," said Julia Poliscanova, director of clean vehicles and e-mobility for European pressure group Transport & Environment. "If, as the evidence seems to show, most people don't charge them, then they are worse than previous-generation cars."

Avoiding 'scandal road'

As far as customers reading the label know, these cars are second only to full-electric vehicles in terms of CO2 output.

The EU-mandated WLTP emissions tests, which replaced the outdated NEDC cycle, states that is the case. For example, the range of new PHEVs launched by PSA Group, including the midsize Peugeot 508 and Opel/Vauxhall Grandland X compact SUV, record figures as low as 29g/km, and that is on the WLTP cycle before it has been translated back to NEDC values, a process known as NEDC correlation.

By comparison a Peugeot 108 minicar, weighing half as much as a plug-in hybrid SUV, emits 93g/km.

Do not blame us for the figure, said PSA CEO Carlos Tavares at Frankfurt auto show last month. "We were not the ones that created that cycle. It was created as a consequence of the previous one, which we considered simplistic," he said.

The PHEV has often been described as a gateway technology to get consumers comfortable with the idea of plugging in their car before taking the more radical step of going full electric.

The EU's seeming generosity in classifying PHEVs as ultra-low emissions vehicles via the test cycle was a calculated decision to boost availability of electrified vehicles, believes Jeff Schuster, global forecasting director for analyst firm LMC Automotive.

"I suspect it's the EU giving the automakers a get-out clause. I don't think anyone wants to go down the scandal road again," he said, eluding to Volkswagen Group's cheating on emissions tests.

Even before VW Group admitted to using software that made its engines operate more efficiently during testing than on the road, it was known that automakers were exploiting loopholes in the old NEDC cycle to avoid fitting expensive exhaust cleaning technology to their vehicles.

LMC predicts that PHEV sales will more than double in Europe next year to 590,000, up from a full-year estimate of 220,000 in 2019.

That would give them a market share of 3.1 percent and briefly help them overtake full-electric vehicles. LMC believes that by 2025 PHEV sales will top 1 million and take a 5.2 percent share.

The problem that automakers now have to deal with is that PHEVs are unavoidably costly, restricting their rollout.

"The plug-in hybrid is a very expensive technology so it makes sense on heavier, bigger, higher-CO2 vehicles where it does more for CO2 reduction and the premium is not as big as small cars," Roelant de Waard, general manager for passenger vehicles at Ford of Europe, said at the launch of the new Kuga, which will offer a PHEV variant.

Fitting a battery, electric motor and the power electronics to an existing combustion-engine car adds about 5,000 euros, according to research from German engineering specialists FEV. The expense is such that a plug-in hybrid drivetrain with a battery big enough to reduce CO2 below 50g/km -- the threshold automakers need to qualify for both EU supercredits and many local tax incentives --actually costs more than a drivetrain for a small electric car with a 32 kilowatt hour battery, FEV said.

Getting the consumer to shoulder the extra cost will be almost impossible, Bernstein analyst Max Warburton believes. Instead, he expects that automakers will have to absorb about 60 percent of the cost of the PHEV technology themselves to be able to sell the cars at the volume required to achieve the EU's 2020-21 CO2 targets.

"It's going to require the industry to force quite a lot of cars into the market. It's going to require them to do very favorable fleet deals. It might require them to sell these cars to their own employees," Warburton wrote in an August report.

Help from incentives

Automakers will have help from local incentives, ranging from purchase grants, company-car tax breaks and permission to drive in restricted low-emission zones. In those countries where incentives are generous, the cars will almost sell themselves.

"It's not so much that we have to persuade buyers -- in some countries the tax system will persuade them for us," Ford's de Waard said. He cited Germany, where the tax on PHEV company cars is half that of conventional cars, and France, which has a steep curve in CO2-based taxation that heavily penalizes large non-hybrid cars. De Waard predicts "a lot of demand" for Ford's PHEVs from those two countries.

The danger is that incentives can be removed as quickly as they are applied. "Sales of PHEVs have been very volatile so far and they really depend on the governments' support," Kia Europe Chief Operating Officer Emilio Herrera told Automotive News Europe.

He cited two cases where local PHEV sales have collapsed. The first was the Netherlands, which was Europe's leading market for PHEVs in 2015. Sales, however, fell fast after the government sharply cut generous company-car tax breaks. By 2017, sales had plummeted 96 percent compared with two years earlier.

The second case is the UK, which had risen to become Europe's biggest market for PHEVs in 2018. But late last year the government removed a 2,500 pound (2,800 euro) purchase grant and as a consequence sales in the first eight months of this year fell 37 percent, compared with a rise of 93 percent for full-electric vehicles. The fall was also partly caused by automakers such as VW, BMW and Porsche removing many of their PHEVs from the market in the run up to the launch of WLTP standards.

Risk factors

There's a risk of backlash against PHEVs if legislators discover that a large portion of government incentives are going to wealthy car buyers choosing premium SUVs fitted with the technology to gain access to low-emission zones or tax breaks, particularly if they're suspicious they are not being re-charged.

The Netherlands has already put a cap of 50,000 euros on the list price for a full-electric vehicle to qualify for tax breaks. This led to a run on sales last year so frenzied that it helped make the Jaguar I-Pace full-electric SUV the country's overall best-seller in December.

The PHEV has really taken off among users of premium cars. For example, 52 percent of Porsche Panamera's European sales were plug-in hybrids in the first five months of the year. This happened despite a huge decline in sales for the car while Porsche worked to make it WLTP compliant.

Meanwhile BMW, Mercedes-Benz, Volvo, Land Rover and Audi now all have plug-in hybrid versions of their large SUVs and are steadily moving down the range with the technology. Mercedes showed a plug-in hybrid version of its smallest car, the A-class compact, at the Frankfurt show.

All models are vulnerable to losing incentives if legislators do not believe they are being plugged in. The Dutch government abruptly removed PHEV incentives after an analysis of fuel-card data showed drivers were not re-charging them and just using them as normal hybrids. The UK government's decision was partly made due to the Dutch data, according to one automaker source.

"People often get plug-in hybrids as a company car for which they get fuel paid on a fuel card, but they don't get electricity paid so there's no incentive to charge," T&E's Poliscanova said.

If the cars aren't charged then the combination of a downsized gasoline engine propelling a vehicle made heavier by the addition of a battery and other components can mean emissions are much higher than a conventional diesel.

"We call them fake electric cars," Poliscanova added.

Plug-in hybrids could lose their reputation for being merely "compliance cars" with the increase in battery range.

The tightening of the rules in the switch to WLTP, a requirement for all new cars since September 2018, meant that automakers had to increase the electric-only range equipping their PHEVs with bigger batteries or lose the benefits that achieving 50g/km or less bring.

So, for example, the new plug-in hybrid version of the BMW X5 large SUV has a 24kWh battery pack compared with a 9.2kWh system for the previous model. BMW says the electric-only range increases to 87 km under WLTP.

Meanwhile the VW Passat GTE's new 31kWh battery is 30 percent bigger than the one in the previous model, increasing the car's electric range to 70 km from 50km in the NEDC cycle.

In addition, the Mitsubishi Outlander PHEV, one of the few models that was ready for the WLTP change, switched to a 13.8kWh battery from a 12kWh one. The extra range means that cars could theoretically not need their gasoline (or diesel) engine on shorter commutes and might come close to achieving the impressive CO2 emissions figures promised by the WLTP cycle.

German supplier ZF Friedrichshafen believes the plug-in hybrid could go even farther in electric mode. It showed a BMW 3-series prototype at the Frankfurt show with a 35kWh battery capable of giving the car an electric-only range of 100 km.

The EVplus "marks a paradigm change with plug-in hybrids," Stephan von Schuckmann, ZF's head of powertrain technology for cars, said in a statement. "Often, the drivers of current PHEVs do not even charge the battery. The reason for this is that the purely electric range is not sufficient for day-to-day life," Schuckmann added.

As well as the extra range, the prototype featured a 127-hp electric motor, which was powerful enough for drivers not to feel shortchanged, ZF said.

The upgrade addresses one complaint about current PHEVs: The e-motor is often too small to deliver the power drivers expect, particularly from larger premium models. To get the performance they are used to, PHEVs driver will often accelerate to the point that the combustion engine kicks in, raising CO2.

Eventually PHEVs will not be needed. Batteries will get better and cheaper, meaning full-electric cars will become just as viable as their combustion-powered counterparts.

LMC believes that next year will be the last in which PHEVs beat or even come close to outselling EVs in Europe. It predicts that full-electric cars will surpass 1 million sales annually in the region three years before PHEVs.

Despite plug-in hybrids seemingly offering the best of both worlds, consumers will not necessarily buy them at full price. "Incentives are required for plug-in hybrids, and you will see the manufacturers essentially force through product introductions," LMC's Schuster said. "It's a gamble but it's one that the industry has no choice but to make."