Can Australia meet the new Vehicle Efficiency Standard (NVES) starting January 2025? - Part 1: Manufacturers

In March 2024, the Australian Federal government took a significant step toward its commitment to a greener future by introducing the New Vehicle Efficiency Standard (NVES). This policy, part of Australia’s National Electric Vehicle Strategy, aims to drastically reduce the country's carbon emissions by mandating national CO₂ reduction targets for new vehicles entering the market, with incremental targets beginning in January 2025.

The NVES framework aligns with international emissions standards and seeks to increase the availability of low- and zero-emission vehicles in Australia. Unlike Zero-Emission mandates in the UK and Europe, it does not require all vehicles to be zero-emission by a specific date. However, several Australian states have implemented their own zero-emission vehicle (ZEV) targets with defined deadlines alongside this national policy.

Victoria, for instance, aims for 50% of all light vehicle sales to be zero-emission by 2030. Queensland has set a similar 50% target for 2030 and aims for 100% by 2036. The Australian Capital Territory (ACT) has an even more ambitious plan, targeting 80-90% of all new vehicles to be zero-emission by 2030.

These targets have been met with optimism. Policymakers, the automotive industry, and environmental groups hail them as both bold and achievable. This optimism has been bolstered by growing momentum in electric vehicle (EV) adoption, particularly among fleet and leasing companies and early adopters. However, as in many parts of the world, early optimism in Australia has given way to a degree of concern. The global automotive industry now grapples with unforeseen complexities, and there is speculation that some of these targets may not be met.

In this blog series, I’ll explore the significant challenges facing various industry stakeholders, including Original Equipment Manufacturers (OEMs), dealerships, federal and state governments, automotive finance and insurance providers, and consumers.

The OEM Dilemma

Let’s start with the OEMs, who find themselves in a difficult position as they work to meet these various ambitious targets on a global scale.

How were the targets established?

In Australia, as in the rest of the world, the NVES policy and various state-based ZEV targets were set amidst rapid EV adoption, especially among fleet buyers and early adopters. However, this overlooked the fact that much of the EV market growth was concentrated in specific sectors, bolstered by financial incentives and tax breaks, while the average consumer still faces cost and infrastructure challenges.

The typical 5 to 7-year product development cycle was also underestimated, resulting in supply chain pressures as OEMs shifted from petrol and hybrid to EV production. Tesla’s success further skewed perceptions of adoption, as its buyers represent a niche, premium market.

What about the consumer?

One major issue for consumers is price. While EV prices have been gradually declining, they remain higher than those of petrol and hybrid vehicles, deterring many buyers. Additionally, some EVs are depreciating at nearly twice the rate of their petrol and hybrid counterparts, which, although beneficial for used car buyers, poses challenges for new EV owners. This depreciation also complicates residual value assessments for automotive financiers, impacting EV affordability on a monthly budget basis.

Another significant barrier to widespread EV adoption remains the lack of sufficient charging infrastructure, particularly in regional and remote areas. While this was already a concern in 2023 when the targets were set, the impact is now more pronounced, with home charging still a challenge for those without off-street parking. Public charging remains expensive compared to home charging. Home charging costs range from 20 to 30 cents per kWh depending on the state, provider, and time of use, while public charging ranges between 40 to 60 cents per kWh, with ultra-rapid chargers reaching as much as 70 cents per kWh.

A final consideration is that Australia accounts for just over 1% of global vehicle sales. This small market size often delays the entry of certain vehicle models and brands, especially EVs, which typically reach Australia only after gaining a foothold in larger markets. This is particularly true of some emerging Chinese EV brands. There is hope that the NVES will increase Australia’s share of the EV market, encouraging manufacturers to bring more EV options to the region.

So, how are we doing?

Although EV sales are growing across Australia, they still fall significantly short of the state-specific ZEV targets. By mid-2024, EVs made up around 8-9% of new vehicle sales nationally. The ACT leads with adoption levels at 21%, while other states show lower numbers: New South Wales and Queensland at 8%, Victoria and Western Australia at 7%, and the Northern Territory, as expected, at around 3%.

Current trajectories show a significant gap between these adoption levels and the 2030 targets of 50% in Victoria and Queensland, and the more aggressive 80-90% target in the ACT, which now seem increasingly challenging.

What can OEMs do?

OEMs have a few options to address these challenges. To overcome price barriers, many are subsidising EV prices, primarily to address the growing global oversupply. This could make EVs more affordable and boost sales. However, this strategy is not sustainable and negatively impacts residual values, potentially dampening future sales. Another option could be to increase petrol and hybrid vehicle prices to level the playing field, though it would be a bold move.

Alternatively, some regions are delaying petrol and hybrid vehicle deliveries to artificially increase EV sales percentages, moving closer to aggressive targets. This strategy is prevalent in countries with substantial penalties for missing EV targets; for instance, in the UK, penalties amount to £15,000 (approximately AUD 30,000) per vehicle for underperformance.

These severe penalties in certain global markets may encourage manufacturers to prioritise EV distribution in those regions, potentially resulting in an EV supply shortage in Australia, where penalties are less severe and start later.

Is there support for OEMs in the NVES?

Under the NVES policy, OEMs are not fined per individual vehicle as they are in the UK and Europe. Instead, the NVES applies fleet-wide CO₂ emissions targets across each manufacturer’s vehicle lineup. If a manufacturer exceeds these limits, penalties are calculated based on the excess of their fleet’s average CO₂ emissions, at about AUD $100-200 per gram per kilometer over the limit.

With the incremental targets beginning in January 2025, the potential financial impact remains unknown, making it uncertain whether measures like those seen globally, such as delaying petrol and hybrid deliveries, will be adopted in Australia.

How can OEMs adapt to these challenges?

Meeting the NVES and state-based ZEV targets, as well as global targets, requires more than simply producing more EVs. It demands a comprehensive reevaluation of supply chains, customer engagement strategies, and financial models. OEMs face pressure to adapt their product development cycles to remain both compliant and competitive.

Data analytics will be critical in guiding OEMs through the global shift to EVs. From forecasting demand and optimising supply chains to managing residual values and enhancing customer experiences, data allows manufacturers to make informed decisions. As shown in our recent Voice of the Client findings, OEMs embracing digital transformation, backed by strong partnerships and insights, will be best positioned for success in this rapidly evolving landscape.

How can we help?

At CGI, we support our clients with data-driven insights to enhance profitability, ensure compliance, and improve the customer experience. By leveraging advanced analytics, we help OEMs manage risk, improve operational efficiency, and stay competitive in a challenging market.

We proudly work with influential stakeholders across fleet, rental, leasing, and automotive sectors, leveraging new technologies to foster innovation. If your organisation is impacted and in need of strategic guidance, please reach out.

Next up – Part 2: Dealerships

Look out for the next blog in our series, which will tackle the challenges dealerships face in light of the NVES and state-based ZEV targets.