Pros and Cons of Battery Leasing, and Legal Concerns

Many drivers and fleet owners are now considering buying electric vehicles. 

However, the cost to replace the battery can be cost prohibitive.  For example, a new battery pack for a Chevrolet Bolt Electric Vehicle (“EV”) is reportedly priced well in excess of $15,000.  However, if it’s properly cared for, an electric car’s battery pack should last for well in excess of 100,000 miles before its range becomes restricted. Consumer Reports estimates the average EV battery pack’s lifespan to be at around 200,000 miles, which is nearly 17 years of use if driven 12,000 miles per year. 

Some manufacturers have considered leasing batteries to buyers to resolve this issue.  We have compiled some of the considerations:

3. Leasing batteries is better than direct ownership for vehicle and equipment owners over a three-year time horizon
   1. It shifts expenses from capital to operating expenses. This is favorable in the short term. But, it always increases the total cost of ownership over the long term
   2. May be attractive to fleet operators or car buyers with constraints on capital
   3. Bottom limit for battery lease price to fleet operator is $177/month[1]
   4. Lease payments during the entire vehicle ownership period result in a significant increase in total cost of ownership compared to the baseline battery direct cost of ownership approach (for vehicles purchased during 2015), despite the reduced CAPEX and elimination of battery replacement costs (OPEX increases, residual value decreases).   The National Renewable Energy Laboratory, which is a part of the Department of Energy provides a helpful analysis of this issue in a paper available here: https://www.nrel.gov/transportation/energy-storage-publications.html#p2015 (pg 4, 59, 71).  The paper provides a formula to calculate the economics of battery ownership.
4. The strongest factors affecting total cost of ownership and payback period are:
   1. Fuel prices
   2. Annual mileage driven
   3. Incremental cost of Electric Vehicles (EVs)
   4. Incremental fuel savings benefit of EVs
5. Manufactures of the vehicles, owning the batteries - Are in the best position to ensure a long life of the battery, given the manufacturer of the vehicle could manage the charging the batteries to ensure the battery never goes below 20% charged, and never exceeds 80% charged.
   
   
6. Risks and Ways to Mitigate - Risks that batteries are never returned could potentially be mitigated by insurance, a GPS, and a mechanism allowing the battery to be rendered inoperable if payments stop.
7. Legal Issues
   1. There could be a conflicting collateral descriptions in UCC-lien filings creating lien priority issues. For example, a lien filing on a fleet of vehicles including “any and all equipment” could arguably include batteries required to operate the vehicles.  For example, under Nebraska Uniform Commercial Code § 9-102 (33) "Equipment" means goods other than inventory, farm products, or consumer goods.
   2. Lenders or creditors repossessing collateral which is equipment or electric vehicles should be careful to confirm whether the batter is owned or leased.
   3. Consent would be required prior to transferring the equipment/vehicle to a new owner.
      1. Lessees of a battery will want to confirm that there is a straight forward process to seek the consent of the owners/lessor of the battery. This will certainly complicate the bankruptcy process if a business has a fleet of electric vehicles.  Creditors counsel will want to be sure that the leases of the batteries and any required consents are addressed before the vehicles or equipment is sold.
      2. The owner/Lessor of the battery may want some sort of deposit from the buyer/potential Lessee. Ideally this would be clearly stated in the lease to avoid an exorbitant amount being requested.
      3. A clear process to seek and receive such approval, and what the owner of the battery could ask for as security, could help alleviate the concerns of lessees of batteries.

Angela Madathil is a Business, M&A, and Deal Attorney and provides legal assistance to buyers and sellers of businesses, as well as business brokers in Iowa, Nebraska, Missouri, and Kansas.   This can involve contract review and negotiation, due diligence assistance, and post-sale integration.  The Goosmann Law Firm team advises to buyers and sellers of businesses, as well as business brokers throughout the Midwest and has attorneys licensed in Iowa, Kansas, Minnesota, Missouri, Nebraska, South Dakota, and other states.

[1] National Renewable Energy Laboratory, pg 4,  DOE-NREL AOP WBS 1.1.2.409 December 2015 Milestone Report