Electric Vehicles adoption: potential impact in IndiaA Power and Utilities perspective

June 2016

2 | EV adoption: potential impact in India

Executive summary: puttingit all togetherElectric vehicles (EVs) present an impactful and beneficial cross-cutting opportunity to the Indian Government. Among the various sectoral intersections, a critical, and a net positive, one is the interaction with the Indian power and utilities (P&U) sector.

Arrival of electric mobility is expected to help the P&U sector realize net cost and revenue benefits from both the demand and the supply side. A summary of these benefits is tabulated below.

These benefits are expected to provide a net positive economic impact of approximately INR200 billion1 to the P&U sector by 2022 — which will further increase with time. The EC benefit to the Indian P&U sector is expected to be in addition to the benefits from other structural improvements currently taking place. The realization of this economic value will depend on effective implementation of an ecosystem to improve EV adoption along with measures to maintain grid absorption. This complex cross-sectoral implementation plan would also need to be assessed for and mitigated against risks, the most prominent of which are the incapability of the grid to absorb mass EV charging and customer perceptions around electric mobility.

Aspect Net revenue benefit Net cost benefit

Supply-side (power utilities)

EVs and a charging infrastructure could present substitute demand to reduce cross-subsidization losses to utilities and bring in additional revenue.

Increased overall base-load demand can enable higher plant load factor (PLF) in conventional generation, produce an effective channel for renewable energy (RE) peak power and avoid losses due to inadequate RE power evacuation.

Demand-side (utility consumers)

Second life for EV batteries can propagate energy independence, leading to revenue generation through net metering.

With high demand for batteries, integrated battery supply chains and markets for ancillary services will develop, leading to reduced storage cost for customers.

Global investment in EVs shows an upward trendBusiness opportunities in clean mobility, increased government cognizance, reduced costs due to pace of research and rising economies of scale, and changing consumer perceptions are paving the path for mass-scale production and envisioned demand of EVs in the coming years. Global EV sales were estimated at 462,000 in 2015 and EVs will constitute 35% (41 million) of new car sales by 2040.2

According to IEA estimates, the US (39%), Japan (16%) and China (12%) are currently the prominent EV stock-holding markets globally. The key differentiator in these countries is the increasing collaboration among several stakeholders: state and federal agencies (for public funding), non-profit groups (to advocate for improved policy), utilities (to co-promote and co-develop the requisite charging infrastructure) and automakers (to continue to improve vehicle efficiency and model availability). Their policies and implementation approaches will be considered as those of the first mass movers.

1. Rough estimate, involving publicly-available data and informed assumptions.2. Bloomberg New Energy Finance (BNEF).

EV adoption: potential impact in India | 3

3. Society of Indian Automobile Manufacturers (SIAM)

EVs in India: low current penetration but significantly high cross-sectoral impactIndia is currently estimated to have 0.4 million electric two wheelers, 0.1 million e-rickshaws and a few thousand electric cars — certainly miniscule compared to the automotive fleet in India, which increased by 20.5 million in FY16 alone3. EVs may

not yet be considered mainstream in India, but with the segment gaining the attention of both domestic and foreign investors, indications point to a growing momentum and a possible disruption.

This accelerated and upcoming EV development is set to disrupt a variety of stakeholders, as depicted below. It presents a complex program with linkages across the energy, manufacturing, consumers, and government sectors.

Exhibit 1: Economy-wide interactions among various sectors and stakeholders

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As part of a programmatic series of analyses by EY, this paper focuses only on the interaction between the EV and the power and utilities (P&U) sector.

4 | EV adoption: potential impact in India

EVs stand to bring net positive economic impact to the P&U sector in IndiaThe P&U sector in India is undergoing rapid transformational developments — reducing dependence on imported coal, rising energy independence with renewables, reducing PLFs and national grid integration to name a few.

Electro-mobility stands to positively address several structural issues faced by the P&U sector as well as accelerate battery storage developments. The resulting net benefits on both the cost and the revenue side of demand and supply will in turn have a positive economic impact on the P&U sector.

• Higher demand during RE generation peak hoursThe Comptroller and Auditor General of India (CAG) estimated the losses of Tamil Nadu State’s wind farms at INR2.04 billion due lack of power evacuation during 2007–14.4 With overnight and afternoon charging, EVs can be a potential solution to increasing demand during low-demand hours, which is also when renewable energy generation peaks. As RE capacity multiplies in the country, EVs can act as a mass distributed medium of storage to level the load curve and provide sufficient evacuation of RE power.

Renewables combined with EVs as storage can effectively offer what can be considered as distributed base-loads, thus providing an efficient solution to maintaining grid stability with intermittent renewable energy.

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EVs charging in the afternoon or late nights can absorb RE peak power with base-load functioning to meet the rest of the demand. This will, in turn, reduce the net load dipping in the current scenario and help maintain a leveled load curve. A leveled load curve would result in cost savings for the entire value chain with higher utilization of base-load capacity (lower fixed cost/unit) and lower requirement for expensive peaking capacity.

• Revenue diversification for discomsHigh aggregate technical and commercial (AT&C) losses and an increase in industrial and commercial captive generation have resulted in heavy cumulative losses for financially weak discoms, which are struggling to buy sufficient power to meet demands. Higher electricity consumption due to demand from EVs would help bridge the regulatory assets on the balance sheets of discoms in the long term (with consumption over the current regular usage being charged at a higher tariff bracket) and help contain cross-subsidization losses due to industrial captive capacity. Smart meters can help discoms confirm/help/support accurate billing and reduce technical and commercial losses (including those due to inaccurate billing and theft).

Discoms are estimated to have incurred losses of INR3,800 billion in FY15. Assuming an electric vehicle has a 100 KWh battery size, annual additional demand for 6 million EVs is expected to be 93 TWh, leading to an additional annual revenue of INR990 billion.

4. CAG’s Union Civil Performance Renewable Energy Report 2015

Exhibit 2: India’s projected load curve (with 20 GW solar generation)

EV adoption: potential impact in India | 5

• Improving utilization of existing domestic coal capacityLower industrial demand has resulted in declining Plant Load Factor (PLF) for domestic coal plants over the past few years (according to CEA, PLFs ranged between 57.6% and 66.86% in FY16).

Exhibit 3: PLF trend for coal plants in India

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Source: Central Electricity Authority (CEA)

Source: Analyst reports

• Reduction in energy storage costCurrently, high storage cost is considered to be the Achilles heel for extensive renewable development. High demand for batteries will lead to the development of integrated battery supply chains, which are bound to considerably lower the costs of storage. Lower storage costs will in turn help lower landed renewable energy costs and make its evacuation more efficient. Within the US and China, the adoption of EVs has led to the setting up of battery manufacturing: China has 16.7 GWh of battery capacity commissioned and 35.1 GWh in development. Similarly, the US has 3.8 GWh of capacity commissioned and 36.2 GWh in development.

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With the adoption of EVs, several new services around charging infrastructure, such as build and maintenance, new battery swapping centers, expansion of battery production/assembly centers and battery recycling, will also come up. This will assist in mainstreaming storage to the Indian P&U sector.

Exhibit 4: Declining battery costs and rising energy density

Though industrial demand is expected to increase in the medium term and a number of coal sector reforms are being undertaken, the introduction of EVs can further improve utilization. In the long term, EVs can help provide demand assurance when energy efficiency and demand response measures are in place.

EY estimates that an addition of 6–7 million EVs on the road by 2020 will need approximately 7–12 GW of installed coal capacity. But with most of the charging done in non-peak hours, the utilization of base-load capacity will increase. This will assist in meeting the additional demand without necessarily adding further new capacity. Additional capacity utilization can also bring down the cost of generation of coal power — the Government of India estimates that for an increase in PLFs from 60% to 90%, the cost of power will decrease by INR1/unit5.

5. Ministry of Power, Government of India

6 | EV adoption: potential impact in India

• Propagation of distributed generation and energy independenceBatteries used in EVs usually have a vehicle lifetime of only 8–10 years, but they have significant capacity and lifetime remaining for alternative uses, primarily in the energy storage sector. This potential second life for EV batteries is a clean energy game changer for two reasons: it can provide cheaper storage for RE capacity and reduce the overall landed EV cost for the consumer.

Cheaper storage, combined with net metering and renewables, has a huge potential in encouraging distributed generation, reducing dependence on discoms and setting-up commercial-sustainable microgrids in difficult-to-reach remote areas through the national grid. This edge-of-the-grid generation is also expected to provide technical stability to the distribution network.

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Source: Navigant Research

Source: EY Analysis

Overall, given these benefits, EVs stand to have a net positive economic impact of around INR200 billion on the P&U sector in India by 2022. This can contribute substantially to the turnaround of the Indian P&U sector as depicted below.

Exhibit 6: Economic benefits to Indian P&U sector by 2022 with EV adoption

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2022 Scenario2015

Indian P&U sector can see a turn-aroundfrom EVs alone

P&U measures needed to absorb EV adoptionThe P&U transition and orientation toward EVs will have to be collaborative and multi-phased. The sector will need to experiment with various business models to address issues around the availability and reliability of the charging infrastructure.

• Charging infrastructure development and standardizationIndia needs to develop and standardize a charging infrastructure to confirm/help/support that the use of EVs in the country picks up. Charging, and possibly fast charging, infrastructure must be deployed or retrofitted in residential areas and public spaces gas stations. It is also critical to place standardization frameworks for the charging infrastructure (including voltage norms and open protocols).

Japan, which had fewer than 5,000 charging stations three years back, now has more charging stations (~40,000) than gas stations (~34,000). This rapid expansion can be attributed to a massive federal subsidy plan (US$1 billion) and collaboration between the four largest automakers in Japan for execution. Such a unique PPP model can help hedge investment and execution risks.

Such case studies imply that the successful implementation of a charging infrastructure blueprint depends on the implementation of the right business model. Utilities and other private players can use existing examples from around the globe to ascertain which business models and which technical specifications (batteries for both charging station storage and battery swapping centers) will work best for them.

Exhibit 5: Capacity and revenue of second-life batteries in world markets: 2014–2022

EV adoption: potential impact in India | 7

• Improving reliability and propagating through public transportationInitial EV adoption within public transport and by the Government will help initiate investment in the charging infrastructure. It is necessary to provide fast high-voltage charging points, and bus depots, parking areas and metro stations are ideal for setting up charging points for buses and shuttles. Battery-swapping stations should also be made available for buses/public transport vehicles plying continuously for long durations.

City-wide pilots (not localized to certain areas but spanning the length and breadth of the city) would be necessary for effective implementation in a phased manner. The Government can involve private players for setting up charging infrastructure on a bidding basis or a PPP basis.

However, the implementation of an ecosystem conducive to EV adoption entails substantial risks. The electric grid must be made resilient enough to absorb the variable loads from both renewables as well as EVs. Timely technical and regulatory measures must be implemented to avoid any grid instability. Another inherent risk is the possibility that investment in the charging infrastructure may not provide adequate returns if there is insufficient EV adoption in the country. A major issue that must be taken care of while developing the charging infrastructure is to maintain standardization in charging points.

About EY’s Electric Vehicle initiativesEY Global Automotive and Power & Utilities Center have created a dedicated team focused on the electric vehicles’ evolution, which will create tremendous opportunities for the entire economy. It brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The sector teams work to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively.

EY has convened leading stakeholders in the global electric vehicle community to discuss the critical issues in the electrification of transportation. Some of the key areas where EY is leading industry discussions, include:• Advising Governments and regulators on policy and engage

For a conversation on how EY can help in developing an electric vehicles strategy, please contact:

Sudipta S. DasPartner, Advisorysudipta.das@in.ey.com+ 91 33 6615 3430

Shuvendu BoseExecutive Director, Advisoryshuvendu.bose@in.ey.com+ 91 124 671 4083

Ajeya BandyopadhyayDirector, Advisoryajeya.bandyopadhyay@in.ey.com+ 91 33 6615 3510

Kanv GargSenior Manager, Advisorykanv.garg@in.ey.com+ 91 124 443 5779

Shikhar GuptaEY Global Power and Utilities analystshikhar.gupta@in.ey.com+ 91 124 470 1233

Shivapriya BEY Global Power and Utilities analystshivapriya.b@in.ey.com+ 91 124 619 2510

with decision-makers at the board level across the industry

• Advising clients across the world on large transformation programs, delivering bottom-line results, innovation, operational excellence and customer service improvement

• Preparing business plans and analyze impact of the electric vehicle market

• Developing a network of electric buses and vehicle to grid experimentation

• Providing end-to-end support in the creation of an electric charging infrastructure

• Provide assistance in implementing pilot projects for electric mobility and EV infrastructure

• Identifying new revenue streams for utilities focusing on electric vehicle growth

• Recommending/advising motivators supporting uptake of electric vehicles

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About EY’s Global Power & Utilities Sector In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY’s Global Power & Utilities Sector brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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