How will rising electricity prices affect the switch to EVs?

How will rising electricity prices affect the switch to EVs?

25 February 2022 | Kate Kozlowska | 19 min read

While the Government continues to urge UK drivers to switch to electric cars and vans in order to meet the 2030 decarbonisation targets, the cost of purchasing and running one keeps increasing. This will inevitably threaten the demand for greener vehicles.

Some electricity providers have already stopped adding new EV customers via dedicated tariffs, and April's energy price cap hike will increase the cost of operating an electric car by between £150 and £200 per year. At the same time, the Government is cutting grants designed to help reduce the cost of buying or leasing zero-emission models and is planning to pull the home charge scheme for many from 1st April 2022, meaning that there will be no financial support for charging points installed at homes. Combining these factors could mean that owning an electric van or car might be as much as £2,050 more expensive than it was a year ago. 

How will the increasing energy prices affect your decision on whether to lease or buy an electric vehicle?   

Take a look at the three factors that will impact the cost of electric cars and vans in 2022 that you should consider. 

EV home charging costs could increase by up to £200 per year as a result of Ofgem's increased price cap

It's the rise in gas prices that receives the most attention, but the increasing cost of electricity cannot be ignored either.  

For households on a default tariff paying by direct debit, the cap on energy prices will rise by £693 from £1,277 to £1,971 per year in April, according to an announcement earlier this year, which will ultimately cause some households' energy bills to skyrocket. At the current price cap, electricity costs an average of 20.8p per kWh in the UK. Under the new cap, this will rise to 28.34p per kWh on 1 April, a 36% increase. Additionally, there is a standing charge cap of 24.88p per day, which will go up to 45.34p.

Ofgem's decision to raise the cap is likely to increase the cost of charging the battery in electric vehicles that are primarily charged at home. The increase, however, might not be as drastic as you expected. 

For the majority of UK drivers, the additional cost per month will be between £12 and £16. This estimate takes into account the average energy consumption of an electric car per mile, average annual mileage (6,8K for 2020), charging exclusively at home, and the maximum rate of 28p per kWh that will be charged on a standard variable rate tariff from April. It means electric car owners will see their average monthly charging costs rise from £37.13 to £49.50, an increase of £12.84. This translates to a £148.44 increase in annual costs from £445.56 to £594 for electric cars. With the elimination of Covid restrictions at the end of February, average mileage is expected to return to pre-pandemic levels (nearly 8K per year). As a result, the cost of recharging an EV's batteries will rise by £200 per year (a bit over £16 per month).  It is important to remember, however, that this is a worst-case scenario. There are many electric car owners who have a dedicated EV tariff, which offers them lower rates for charging off-peak. Additionally, many EV owners may be able to charge their vehicles at work or at supermarket car parks for free but then again will need to pay to use public charging stations, especially at motorway services when making longer journeys.

As the cap rises in just over a month, drivers are encouraged to shop around. Rod Dennis, a RAC spokesman, says electric car owners on standard variable rate tariffs will be hit with substantial increases from April. He says:  'It can make a lot of sense to swap to one that’s specifically designed for EV drivers and offers cheaper overnight electricity prices. Drivers need to brace themselves for rising prices from public charging networks too. We’ve already seen some increases announced by operators in recent months, and we’d expect to see more as we get further into 2022.'

However, the lack of EV tariffs is a major issue. Due to rising energy costs, many providers have pulled their EV offerings. EDF and Octopus Energy are currently offering the fixed-rate EV tariffs, with off-peak rates as low as 4.5p and 7.5p per kWh respectively - which is up to 23.5p per kWh less than the maximum electricity price from April. As a Bulb customer with a smart meter, you can also switch to EV tariff to take advantage of the 4.65p rate between 2 am and 6 am - just for reference, the standard tariff is 24.90p per kWh. Please note these are London rates and might differ in other areas.

Despite the price cap increase, Octopus has no plans to discontinue or make any drastic changes to its EV tariff. Fiona Howarth, CEO of Octopus Electric Vehicles, explains: 'For many drivers, charging your car at home is as simple as charging your phone, and EV-specific energy tariffs like Octopus Go offer cheap, green energy in the middle of the night. Filling your car on that overnight rate costs just £12 a month for a typical British driver - saving over £1,000 every year compared to old school petrol.'

The recharging costs of electric vans and cars will increase from April 2022, but petrol and diesel vehicle drivers are also pulling their hair out when refuelling. Petrol and diesel prices have already hit record levels, and with oil nearing $100 per barrel, fuel prices might rise further in the coming weeks.

Petrol car drivers now pay around 27p more per litre of fuel than they did a year ago, with the unleaded price over the weekend hitting 148p-a-litre, up from the average price of 121.5p in February 2021. Using a family car that averages 40 mpg, and the average annual mileage of 6,800, the difference in fuel bills is already £1,144, up from £939 a year ago. This is expected to increase when pump prices rise again in the spring. Even if you compare that with the £594 bill for EV drivers after the cap, they are still £550 better off than those driving a similar petrol vehicle. 

EV grants were reduced twice in just 9 months, making electric vehicles £1,500 more expensive to lease or buy than a year ago  

EVs still have higher upfront costs than petrol and diesel equivalents, so even those who are the biggest supporters of electric cars and vans cannot deny that this is one of the biggest obstacles to moving into the zero-emissions world. The situation is especially dire now that the Government has slashed grants for electric vehicle purchases and leasing. 

Plug-in grants were first introduced in 2011 in order to help reduce the gulf between zero-emission vehicles and conventional petrol and diesel cars and vans. They initially offered to subsidise the cost of a new battery-powered car by up to £5,000, which was then extended to vans, offering up to £8,00 for those leasing or buying an electric commercial vehicle. The scheme, however, has gradually been scaled back over the years, with the incentive being reduced in line with decreasing EV prices and growing demand (according to MPs, anyway).

This most recent plug-in grant cut occurred in December 2021. The program now only applies to new electric cars priced up to £32,000 and the grant amount is just £1,500. A year ago you could lease or purchase an electric car up to £50K and receive a plug-in grant twice the current rate. For electric vans under 2.5 tonnes (GVW) or less, the grant limit has now been lowered to £2,500 or £5,00 for commercial vans from 2 to 3.5-tonnes.

Only about 20 electric car models sold in the UK qualify for the EV grant, and these are mainly smaller cars with lower-capacity batteries and therefore shorter ranges. Moreover, the grant does nothing to offset the current premium on electric vehicles, even at the most affordable end of the market.

Octopus EV estimated that combustion cars cost around £5,000 less than battery vehicles, even at the lower price tag. However, in practice, the difference is likely to be double that amount. Currently, the lowest-spec petrol Volkswagen Golf is £10,000 more expensive than the similarly-sized ID.3 electric hatchback.  It costs £17,5K for a petrol Mini hatchback and £27,000 for an electric Mini model. The petrol-powered Hyundai Kona SUV costs £21,615, while the electric Kona nearly 29K. Vauxhall Corsa-e is £10,000 dearer than a petrol Corsa. It is simply not enough to fix this substantial price gap with a £1,500 grant. 

Insiders say a government that is pushing for a transition to EVs ahead of a ban on new petrol and diesel vehicles by 2030 has sent the wrong message with its repeated incentive cuts.

Jim Holder, editorial director of What Car?, said: '[The Government] wants to promote environmentally-friendly transport, yet it is reducing the incentive to do so at a time when electric cars are still more expensive to buy and represent a minority in the new car market.'

Michael Hawes, chief executive of the Society of Motor Manufacturers and Traders, called the move a "blow to customers making a change" and said it couldn't be more inconvenient. 'Electric vehicle take-up is surging, thanks to an ever-growing model range and compelling offers, such that we expect almost one in four new cars registered this year to have a plug. Government and society ambitions, however, are even higher and we have to accelerate if we are to meet our net-zero goals. Government can help by continuing to provide incentives that help all drivers make the switch, and investing in infrastructure so recharging is actually easier than refuelling. With energy prices increasing, the role of such measures are even more critical, so we should be looking at every way to ease the burden of increasing costs or risk stalling take-up at the worst possible time.'

AA president Edmund King called the decision 'counterintuitive' and said many drivers will have to assess if they can afford to buy an EV now that grants and thresholds have been slashed.

In addition, he suggests MPs may be misreading the level of demand for electric cars, which are being inflated by many registering them for generous salary sacrifice schemes, which mean that benefit in kind taxation is only 1% for 2021/2022. 

Fiona Howarth, boss of Octopus EV, explained: 'For now, grants are the simplest way to overcome the upfront cost hurdle. With so much opportunity for the countries that move early on EVs - keeping a strong grant incentive now will help kick EV uptake into top gear.' 

Drivers of electric cars may point out that they are expensive but prices for diesel and petrol models are also increasing as manufacturers fit more equipment and technology in response to consumers' demands for safety and connectivity. A basic Vauxhall Corsa now costs around £17,000, meaning you can forget the days when you could buy a brand-new car for less than £13,000.

Electric cars have also become more attractive to drivers because of their lower benefit-in-kind tax rates and salary sacrifice schemes, which is one of the major factors driving the EV boom in the current market. Moreover, strong second-hand values benefit those leasing electric vans and cars because depreciation is limited. 

EVs will become cheaper with time, although it will probably be years before they are cheaper than a basic petrol car. It is predicted that an average electric car will be cheaper to make than an equivalent petrol car from 2027. Even without grants, EVs will be more affordable to buy due to falling battery costs, new vehicle architectures, and dedicated production lines.

With the end of grants for home charge point installations from 1st April 2022, owning an electric vehicle will cost an additional £350

With the Electric Vehicle Homecharge Scheme (EVHS), which has been available since 2014, motorists with off-street parking facilities at home have access to a £350 grant towards the installation of a chargepoint. However, the scheme is set to be scrapped for many people on the property ladder within a couple of weeks.   

Homeowners living in 'single-unit' properties such as bungalows, detached and semi-detached houses, and terraced buildings will no longer be eligible for the EVHS. It is required to complete any installations by 31 March 2022 and submit a claim by 30 April 2022 in order to receive the grant before it closes.  Although it seems like plenty of time, many installers are now fully booked. 

The grant will continue to be available to flat owners and renters, though this represents a smaller group of electrified vehicle owners.   

Ginny Buckley, Founder and CEO of EV site Electrifying.com, says: 'Despite the upfront cost being higher than petrol or diesel engined cars, electric vehicles are cheaper to run - especially if you can charge at home, which is why it’s so important to make the most of government support while you can.' 

In addition to price and range anxiety, one of the main issues that motorists face when switching to an EV is the lack of public charging infrastructure. Homeowners in Britain without off-street parking account for a third of those concerned.

More than 7,600 new chargers have been added to the country's network in the last year, totalling 28,375 publicly accessible charging points.  According to an analysis, there were 24 new electric cars registered for every public charging device added to the network in 2021. In advance of the 2030 ban on new combustion motors, experts warn that the current pace of infrastructure investment is way too slow.

Jamie Hamilton, automotive director and head of electric vehicles at Deloitte, says: 'While new EV models are offering longer-lasting battery charges, the perceived lack of public charging infrastructure remains an issue. Significant investment is required to avoid a scenario where EVs are only a realistic option for consumers with off-street parking.' 

The UK head of automotive at KPMG, Richard Peberdy, explains: 'National and local government need to focus more on the role they can play in increasing the amount of public charging infrastructure - supporting business models to both deploy more chargers around the country and develop faster, sustainable, charging technology.'

According to a new campaign group, FairCharge, the Chancellor should stop the higher taxation for on-street charging points in the UK so that the cost of using the public network can be lowered. At present, domestic electricity is subject to a 5% VAT rate. However, public charge points charge 20%VAT. 

 

Will the increasing electricity costs and the reduction of EV grants be enough to deter you from switching to an electric vehicle? Hopefully not! If you're ready to take the next step towards becoming emission-free, we have a range of electric car and van leasing deals available. Discover our best offers below! 

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