Using a total cost of ownership procurement method

Zero emission vehicles (ZEVs) currently have higher capital costs than their internal combustion engine (ICE) counterparts, but they have lower running costs. It’s essential that you consider all aspects of vehicle ownership when working out cost comparisons between ICE and ZEV models. As a minimum, the areas to consider are:  

• Depreciation (if purchased) / lease costs (if leased)

• Service, maintenance, and repair costs

• Value added tax (VAT)

• Vehicle excise duty

• Fuel and electricity costs

• Class 1a national insurance contributions (NIC) if applicable

• Vehicle insurance

• Grants that may be available for specific vehicles and charging infrastructure

Adopting a total cost of ownership (TCO) based policy often satisfies financial and environmental objectives. This is because vehicles with a lower TCO use less fuel and emit fewer pollutants. Whereas the TCO analysis includes ZEVs, a holistic approach must consider operational requirements such as range and opportunity to recharge.  

Organisations using a different approach to TCO will often buy vehicles that are cheaper to acquire but more expensive to run over their operational life.  

TCO comparisons between ICE and BEVs

The table below shows TCO comparisons between a variety of ICE vehicles and battery electric vehicle (BEV) alternatives (October 2023). This assumes that these vehicles are leased for four years and are driving 10,000 miles per year. ZEVs are not always the lowest cost option, but they are the lowest carbon option. Using the TCO model allows you to put a cost on your carbon reduction programme.

The comparisons in table 22 below don’t consider NIC as it’s assumed that vehicles are pool vehicles and not for staff personal use. If vehicles are for staff personal use, such as company cars, NIC must be included. This will work in favour of the electric models as they carry a lower benefit in kind rate. For certain models, the NIC saving from switching from ICE to BEV amounts to thousands of pounds per year. Insurance is not included in these comparisons.

The ZEVs mostly come out cheaper over the term of the lease. This is down to their lower running costs and associated taxes. Savings will continue to increase for vehicles that travel more than 10,000 miles annually. However, those with a lower mileage can work out more expensive than their ICE counterparts.  

You should also factor in the cost of charging infrastructure. Charging infrastructure will have a much longer lifecycle than the vehicle lease. You must consider this when deciding whether leasing is the right choice for your organisation.

There will be many internal factors that influence the procurement approach used. Whether you lease or purchase, using a TCO analysis will make sure you select the most suitable and cost-effective vehicle models.