25 mar 22

Surging fuel prices mount up to an extra 8% of share in TCO

Fuel is the single most important operational cost in the Total Cost of Ownership or TCO. Because of the Ukrainian invasion record-high fuel prices are taking a serious bite out of the TCO of fleet cars all over Europe. The spike will serve as an accelerator for EV adoption, but how significant will the side-effects be, and where will that leave TCO in the end?

TCO is all but a fixed set of costs, and for an operational fleet, fuel has been the critical expense of all running costs. And when we say fuel, we mean fossil fuel. Because, the only vehicle type where on one hand service, maintenance & repair on the other hand insurance are slightly more costly than energy is a battery-electric vehicle or BEV.

However, according to a whitepaper from Leaseplan, the differentiating margins for EVs remain very small (energy: 10%, insurance: 11% and RMT: 12%). With electricity prices not immune to the crisis either, it remains to be seen if these ratios can be maintained for the current year.

A better understanding

The size and width of the surging fuel prices shouldn’t be underestimated. According to Fran Ponton, Business Development Director at fleet consulting firm Traxall International, their impact can be calculated at an increase of up to 8%. "Fuel shares can mount up to 20%, depending on fleet size and mileage. If you consider that energy prices have risen with a third, the share of fuel in the TCO breakdown will rise by 6 to 8%", he explains.

To have a better understanding of the effect, let's have a look at the share of fuel for the TCO of different vehicles (data from Leaseplan’s CCI 2021):

  1. Plug-in hybrid: 17%
  2. Diesel: 17%
  3. Petrol: 23%
  4. Electric: 10%

Putting the layer of the increased fuel prices on top of those figures, the share for petrol cars will surpass a quarter and diesels will be pushed above 20%. These are serious highs. For commercial fleets and high mileage cars, the effect will run deep. But if you know what your fleet is up to, there's room to prepare and undercut the impact.

Three-point guideline

There is little that companies can do to fight high market prices, but they can address their PHEV drivers. Adam Longenecker, Strategic Sourcing Lead EMEA, Zimmer Biomet: "Persuading our PHEV drivers to plug in as much as they can, is the first thing we did as soon as the prices started to rapidly increase to keep TCO under control."

Fran Ponton proposes a three-point guideline to minimize the impact of fuel share on TCO:

  • Get efficiency up
  • Think about EV adoption and an appropriate strategy
  • Reduce mileage by turning to pandemic measures like homeworking, carsharing et cetera

Here to stay?

The most crucial question is: are we looking at a long spike with a small footprint in time, or a table mountain graphic that will install a new tariff floor? In other words, will the changed fuel share for TCO leave a permanent mark?

According to Ponton, the high prices aren't going anywhere because of the current geopolitical instability bandwidth. "I don't see the price pressure on fuel being relieved soon because of the incertitude around Ukraine."

Jaap van Daalen, Commercial Director at fleet management & consultancy company Fleet Support thinks alike: "Fleet professionals will need to look to fuel differently from now. And employers will have to realize that, if fuel is included in the allowances and leasing budgets, vehicle choice will decrease if budgets are not raised. So, the high prices might have an even bigger effect on employee motivation than cost. Employers will have to make a choice between happy employees or higher costs."       

The evolution of TCO

Though the background is exceptional, the TCO pie typically has always followed flexible cost lines, and an undeniable fuel share evolution was already at hand before the current turmoil. As van Daalen points out, there was a bottom level for gas prices in 2017. After that, the fuel share has risen consecutively year after year for all types of cars: petrol, diesel and electric.

According to the data from Fleet Support (collected on the Dutch market but representational for Europe), especially SUVs were affected. Their TCO reports an increase of +24% in fuel share over 2017-2022. But small cars, both diesel (-11%) and petrol (-5%), improved over that window, albeit as the exception to the rule. Compact passenger cars rose +8% in petrol and +18% in diesel versions, for premium compacts the figures are +16% and +19% respectively.

Indeed, in general the diesel segment (+21%) was the biggest culprit and got affected almost double as hard compared to petrol (+11%) over the same period. Diesel is the most impacted fuel in the current crisis also.

Looking at those figures, it seems that the current prices serve as a booster for an already ongoing trend. The rise of fuel share in TCO will act as an accelerator in turning the tables for the adoption of EVs. It is something every expert agrees upon.

A complex future

Maybe a surprise, but the energy share for the TCO of EVs is surging at what seems an alarming pace (2017-2022: +70%). But there’s an explanation for the phenomenon. "The development of electric vehicles needs a much broader understanding. Here we have to consider that the TCO share of depreciation is strongly decreasing due to improved residual values.", says van Daalen.

So, make no mistake, the energy costs of an EV remain much lower in absolute terms than with comparable ICE vehicles, certainly in the scenario of high mileage and longer duration of contracts. According to Leaseplan's latest Car Cost Index (CCI 2021) the benefit is more than half (-54%).

But will electric fleets maintain their fuel cost advantage in the future? 'There's a lot of uncertainty there', says Ponton, "Governments will lose significant income from excise duties when more and more electric green fleets come about. But, without any doubt, they will compensate for these losses by adapting taxes on electricity."

Bear also in mind that the very nature of electricity pricing is different from traditional fuels, more dependent on intraday peak tariffs and there are possible benefits of fixed pricing through longer-term contracts. Undoubtedly, smart charging with connected EVs will play a decisive role for fleets in keeping the energy slice of the TCO pie under control and as low as possible. "Those price fluctuations will make electric fleets more complex than the traditional ones', concludes Longenecker. As we said before, TCO isn't static. Far from it.

Image source: Shutterstock, Leaseplan

Authored by: Piet Andries