Chapter 5. Simulated Analysis
D. Government Module
3. Scenario Analysis
For our study, we set up nine different scenarios, each representing a different EV purchase subsidy amount, in order to examine the possible influence of subsidy amount on EV demand. Before introducing our scenarios, we first clarified our assumption about the gross amount of EV purchase subsidies from the government. After the gross amount was determined, we examined how reducing the gross amount in phases affected EV demand.72 Our analysis assumed a gross amount of KRW 2 trillion (KRW 10 million per vehicle for 250,000 EVs to be sold) as the government’s budget for EV purchase subsidies.73
The scenarios used for analysis are as follows.
Scenario 1. Each consumer receives a subsidy equal to the difference in price between the purchased EV and an ICE vehicle of the same class.
Scenario 2. A subsidy of KRW 20 million per EV is granted in the first year; the subsidy decreases by KRW 1 million in each of the subsequent years.
Scenario 3. A subsidy of KRW 19 million per EV is granted in the first year; the subsidy decreases by KRW 1 million in each of the subsequent years.
Scenario 4. A subsidy of KRW 18 million per EV is granted in the first year; the subsidy decreases by KRW 1 million in each of the subsequent years.
Scenario 5. A subsidy of KRW 17 million per EV is granted in the first year; the subsidy decreases by KRW 1 million in each of the subsequent years.
Scenario 6. A subsidy of KRW 16 million per EV is granted in the first year; the subsidy decreases by KRW 1 million in each of the subsequent years.
Scenario 7. A subsidy of KRW 15 million per EV is granted in the first year; the subsidy decreases by KRW 1 million in each of the subsequent years.
Scenario 8. A subsidy of KRW 14 million per EV is granted in the first year; the subsidy decreases by KRW 1 million in
72 Given the current budget-making structure in Korea, it may not be possible to set an initial gross amount for EV purchase subsidies.
However, initial subsidies were determined for this study to explore the dynamic way that government subsidies potentially affect EV demand.
73 This gross amount may strike the reader as arbitrary at first. The Korean government, however, has announced plans to raise EV demand to 250,000 vehicles by 2020. EV experts in Korea and cited sources abroad project that the Korean government will continue to subsidize EV purchases until 2020. The Korean government currently provides subsidies of KRW 14 million for each EV purchase, with consumers eligible for additional subsidies (in varying amounts) from local governments. It is therefore reasonable to assume that EV buyers can potentially receive subsidies of at least KRW 10 on average until 2020. Our simulations assume subsidy amounts that combine subsidies available from both the national and local governments.
each of the subsequent years.
Scenario 9. A fixed subsidy of KRW 14 million per EV is provided each year for the duration of subsidy policy implementation.
Figure 5-8 shows how the EV demand changes under different scenarios, and Figure 5-9 shows the number of EVs likely to be sold under each scenario by 2030. The two figures show that EV demand is higher when the initial subsidy amount is greater (Scenarios 1 through 5) and when the subsidy amount remains the same for the duration of the subsidy program (Scenario 9) than when the initial subsidy amount is smaller (Scenarios 6 through 8). This trend reflects the decrease in EV prices represented in our model. Our model assumes that, the greater the number of EVs sold in the early years of subsidy implementation, the larger the margin at which EV prices decrease over time. Even after the subsidies have been discontinued, the dropped EV prices would still make EVs an attractive choice to consumers, thereby inducing EV purchases.
A comparison of Scenarios 2 through 5 is particularly interesting. In these scenarios, the EV demand ultimately decreases as the initial subsidy amount increases. This is because there is a limit to the gross amount the government can realistically spend on EV subsidies. The greater the gross amount of funds, the higher the subsidies the government can provide in the early years of the program. When the gross amount of funds is limited, however, providing large subsidies in the early years quickly drains the subsidy budget, which may have the effect of slowing down the growth of EV demand. As seen in Figure 508, EV demand grows at the fastest pace in Scenarios 2 and 3. As the subsidies run out, however, the growth rate of EV demand significantly decreases.
Figure 5-8. Trends in the Growth Rate of EV Demand Under Different Scenarios
시나리오 Scenario
Figure 5-9. Cumulative Numbers of EVs Sold by 2030 by Scenario
Our analysis shows that the initial subsidy amount is the most critical factor in determining the effectiveness of the government’s EV subsidy policy. The initial subsidy amount should be decided based on the gross amount of funds available for the subsidy program as well as the subsidy’s effect of making EV prices fall. In other words, the government should not deplete its subsidy budget too early in the program by providing subsidies that are too large in the first few years. However, neither should the government hinder the decline of EV prices by providing subsidies that are too small in the early years.
The subsidy amounts provided early on are similar in Scenarios 1 and 2. In these two scenarios, however, EV prices fall at different rates, causing the subsidy amount in Scenario 1 to decrease drastically over time. In Scenario 1, the decrease in subsidy amount over subsequent years of the program has the effect of postponing the depletion of the subsidy budget, and enables the subsidy policy to contribute to raising EV demand for a longer period of time.
In Scenario 9, EV demand barely increase in the first few years. However, as the same subsidy amount continues to be offered year by year and as EV prices fall over time, demand rises rapidly in the later years of the program.
Of the nine scenarios, Scenario 5 was the one that raised EV demand the most significantly, followed by Scenario 6. There was, however, little difference between the two scenarios. Our simulations showed that the appropriate subsidy amount for the first year ranges between KRW 17 million and KRW 18 million, which is roughly equivalent to the amount of subsidies Korean consumers receive today.
Under Scenario 5, we introduced the following additional scenarios specific to EVs.
Additional Scenario 1: Charging station accessibility increases by one percent every year.
Additional Scenario 2: Midsize EVs and electric SUVs are launched.
Additional Scenario 3: EV mileage increases by one percent every year (increasing driving distance).
Additional Scenario 4: Battery charging time decreases by one percent every year.
Additional Scenario 5: Carbon dioxide emissions decrease by one percent every year.
We introduced these additional scenarios in order to explore the possible effects of other policies accompanying EV purchase subsidies on EV demand.
Figure 5-10. Effects of Additional Scenarios on EV Demand Under Scenario 5
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Our analysis of the additional scenarios showed that the policy effect of fostering EV demand was the greatest when EV subsidies were accompanied by increases in mileages. Improvements in mileages led to improvements in driving distances, thereby significantly increasing consumers’ probability of choosing EVs more than in other additional scenarios.
Figure 5-11 shows how the introduction of other policy measures (i.e., those represented by the additional scenarios) affects EV demand.
Additional Scenario 6: Incentives are provided, out of the EV purchase subsidy fund, for private-sector charging service operators to encourage them to invest in expanding charging infrastructure.74
Additional Scenario 7: Midsize EVs and electric SUVs are successfully introduced in the market (making up one percent of all midsize and sports utility vehicles sold as of 2018).75
Under Additional Scenario 6, private-sector charging service operators are assumed to receive financial incentives, out of the EV purchase subsidy fund, to invest in charging infrastructure.
74 At present, private-sector charging service operators in Korea can expect little return on their investments. In Additional Scenario 6, private-sector charging service operators can expect returns on their investment, greatly increasing charging station accessibility.
75 The launching of Hyundai Ioniq in 2016 dramatically increased the number of EVs sold in Korea. The share of EVs in the Korean- made small vehicle market rose rapidly from 1.1 percent in 2015 to 2.4 percent in 2016 and to 4.9 percent as of September 2017. As there are no midsize EVs or electric SUVs available on the Korean market at present, the initial probability of Additional Scenario 2 was too small, which is why Additional Scenario 7 was further introduced.
Figure 5-11. Effects of Additional Scenarios Under Scenario 5 on EV Demand
Figure 5-11 shows the importance of successfully introducing diverse EV models to the market. Currently, SUVs represent over 40 percent of all new vehicles sold in Korea, while midsize vehicles represent 14 percent. Midsize and sports utility vehicles are major sellers in the family-friendly vehicle market. In order to successfully raise EV demand, it is crucial to increase consumer choice by diversifying the EV models available in the market. It is also equally important to adopt measures to boost the charging market. As the charging market grows, the charging infrastructure expands as well. Our model shows that expanding the charging infrastructure increases consumers’ probability of choosing EVs by improving consumers’ access to charging stations. This involves increasing the indirect network effect on the EV market.