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December 8, 2016updated 12 Apr 2017 3:44pm

Could diesel charges disrupt LCV leasing?

LCVs are a key sector of asset finance, with vans and other vehicles critical to many operations. However, diesel pollution and emissions are potential issues. Saad Ahmed spoke to lessors and a transport authority to assess how environmental factors could dramatically change the industry

By Brian Cantwell

LCVs are a key sector of asset finance, with vans and other vehicles critical to many operations. However, diesel pollution and emissions are potential issues. Saad Ahmed spoke to lessors and a transport authority to assess how environmental factors could dramatically change the industry.  

Light commercial vehicles (LCVs) are often seen as business-critical to many industries, and lessors report a wide variety of corporate clients.

“It’s across most sectors,” says Richard Tilden, head of commercial vehicles at Lex Autolease. “We do a lot in facilities management, construction and manufacturing, where the vehicle is not necessarily the modus operandi, but supports operations.”

The centrality of LCVs to many industries can cause a great number of businesses to be vulnerable to sudden changes in regulation surrounding them. Specifically, the proposed introduction of charges on vehicles that do not meet certain emissions standards will fall mostly on lessees of LCVs, which are overwhelmingly diesel engines.

Leasing Life spoke to LCV lessors about the impact of potential diesel charges on demand for leasing, alternative fuel types, and developments in the industry, and how they have been impacted by recent events.

Leasing Life also heard from Transport for London (TfL) about its emissions aims, and asked LCV lessors about the impact it could have on their industry.

What’s the charge?

The push towards reducing global emissions has picked up pace in recent years, with the Paris Agreement a major development.

In the UK, responsibility for lower emissions has been largely given to drivers and operators of vehicles. Though country-wide legislation has been passed in previous years, London, as the capital, has led the way in this area.

The congestion charge was introduced under then-mayor Ken Livingstone in 2003, with the aim of reducing congestion and vehicle pollution by creating a financial disincentive to drive in the central areas of the capital.

The London Authority has introduced proposals to introduce a daily emissions surcharge – or “T-charge” – for diesel LCVs that do not meet Euro-6 emissions standards. As LCVs are primarily diesel-fuelled, lessees may experience a financial disadvantage as a result.

The proposals drawn up by the Mayor of London and TfL seek to promote and extend an Ultra-Low Emission Zone (ULEZ), by reducing air-pollution, with a particular focus on NO2 emissions, which they claim cause 9,400 premature deaths in London each year.

The report says: “Diesel vehicles are recognised as a major contributor to pollution and associated health impacts in London, and the Mayor wants to phase out these vehicles from the bus, taxi and other fleets.”

The initial proposals, drawn up under Mayor Sadiq Khan’s predecessor Boris Johnson, were scheduled to come into effect in September 2020, but the current administration intends to bring this forward to 2019.

Andrew Wright, business development manager for the transport, industrial and construction division at Société Générale Equipment Finance, warns that this could disrupt existing LCV leases.

Wright explains: “The pulled-forward date could leave current buyers with only two years’ use on what should be a three-to-five-year asset.

“If they’re buying now, they’re perfectly at liberty to buy derogated vehicles up until September 2017. But they’d only be able to run those vehicles without the charge for two years before the charge kicked in. That would put an additional burden on their business.”

Wright argues that the introduction of the charge would impact fleets in the middle of their lease term, something which may not have been accounted for financially.

While he says that larger companies may have the resources to adjust their accounting to mitigate for this, companies running smaller fleets may decide to pass on the increased costs to the customer.

Tilden says larger fleets are unlikely to be impacted by these charges, as a result of the typical age of their vehicles. He explains: “The vast majority of our fleet would be unaffected by these charges. The leasing industry tends to run younger vehicles, [those] under five years old.”

The burden of these charges is more likely to fall on smaller lessors, and businesses which run their own, smaller fleets, with vehicles that may be older than five years, and therefore do not comply with either of the Euro-5 or Euro-6 standards.

A knock-on effect of the introduction of the charge may be the addition of obstacles to LCVs entering London. As the measures are designed to discourage driving into London in order to curb emissions, they may impact upon lessees’ willingness – or ability – to do business. If these proposals are implemented in other cities, they could add significant barriers to small businesses.

Those speaking to Leasing Life indicate that larger fleets were more likely to have more recent vehicles in their fleets, which may meet the Euro-5 and Euro-6 emissions standards. Smaller fleets, however, have a lower turnaround, meaning the charges could hit their businesses before they have the ability to renew their fleets, or properly implement a strategy.

Nigel Kerr, sales development director at Lombard Vehicle Solutions, says: “This is more likely to affect the older, smaller fleets and it will certainly have an impact on those businesses, but it won’t just be London that’s affected.

“With new clean air consultations going on for other major UK cities, this is likely to be a growing trend across the country.”

If small businesses follow the likely example of the larger fleets, they will continue business as usual, but will be forced to find a way to mitigate the increased costs.

How to respond

Toxicity charges on diesel vehicles have been discussed for many of the UK’s major city centres, but have only extended beyond proposal stage in London. Those Leasing Life spoke to suggest that users of LCVs would respond in different ways.

As smaller businesses, such as small courier services or builders, would have to absorb the charge, the prices for their services may increase as the cost may be passed on directly to customers.

Wright says: “Small to medium enterprises will probably absorb the cost of the charge into their cost base, and maybe even pass it on to the customer.”

However, Kerr offers an alternative solution. He believes that, in response to the charges, some companies using small fleets may choose to replace vehicles to compliant models instead.

He says: “Some smaller companies could find it more cost-effective to sell old pre-EU-5 vehicles and lease new, clean vehicles.”

According to Wright, the strategy of pre-emptively replacing vehicles that would fall foul of encroaching regulations is something larger fleets are more likely to consider.

He says: “The fleet users will have accountants that will analyse the cost of the charges versus the premium for the Euro 6 models. They will look at the cost of their fleet that are operating within the charging zones and they will balance that against the price of the Euro-6 [-compliant] vehicles.

“They may decide to dispose of the ones they’ve got and buy Euro-6 models in 2019, and might bring forward their buying plan.”

The possibility of acquiring LCVs with a different fuel type may also be a consideration. As the charges will impact diesel engines as a result of their emission levels, LCV users may explore petrol, hybrids and hydrogen as alternatives.

Kerr warns that though some companies would be willing to take this route, alternatives to diesel are not readily available.

He says: “Access to petrol LCVs is very limited, especially on medium- and large-sized vans. As more petrol vans become available they will become more accepted, especially if there is a cost saving to be realised.”

While alternatives to diesel are not readily available in the LCV space, some original equipment manufacturers (OEMs) are beginning to look more seriously at hybrids.

Kerr tells Leasing Life that Lombard offers some electric LCVs, but hybrid LCVs are not currently being developed by OEMs.

He explains says: “There aren’t currently any OEM hybrid LCVs available, but it won’t be long before they get here.

“The technology used in hybrid and plug-in hybrid cars is already being looked at by some manufacturers, and with most hybrid vehicles being petrol this would be a major step forward in the clean air challenges we face. Lombard offers leasing on electric vans, and will offer hybrid as soon as it becomes available.”

Lex Autolease launched a trial of Hyundai ix35 fuel-celled cars at the University of Birmingham earlier this year.

Chris Chandler, principal consultant at Lex Autolease, says: “Hydrogen fuel-cell technology is very much in its infancy in the UK, with just a few vehicles of its kind in the country.

“The decision to incorporate the cutting-edge Hyundai ix35 fuel cell into its day-to-day fleet is testament to the University of Birmingham’s commitment to pushing boundaries and trailblazing new technology.”

However, as a very-much-emerging technology, it is far from entering the mainstream of even private cars, and therefore its adoption in the LCV market is distant.

Though despite some small steps in this direction, even medium-scale production and adoption is far from close, and any plausible diesel alternative is unlikely to enter the mainstream before the toxicity charges come into force in 2019.

Kerr believes that even as alternatives emerge, companies will be slow to take them up. He says: “There are a few electric options available, but businesses are slow to adopt these new technologies.”

Driving demand for leasing

Though the potential diesel charges are likely to have an effect on the market for LCV leasing, these may not become immediately apparent.

Other factors in recent months may have had an effect on demand for leases. The lowering of the Bank of England base rate to the record low of 0.25% in August 2016 may have contributed to increased demand for LCV leases as the cost of finance fell.

According to Kerr, the LCV leasing market has continued to grow, and lower interest rates have interacted with lower prices, stimulating the market, and encouraging the acquisition of new vehicles.

Kerr says: “The LCV new vehicle market has been growing for a number of years now, and the mixture of lower interest rates and discounted vehicles has created an ideal opportunity for businesses looking to source new vehicles. This has led to LCV leasing being more attractive to a wider audience of van operators.”

If the toxicity charges for non-compliant vehicles are approved for 2019 enforcement, it is possible that they could also stimulate the sale of LCVs to fleet operators.

Though the interviewees all tell Leasing Life of the potential challenges that diesel charges may bring, some were able to see the opportunity, with smaller fleets seeking to replace non-compliant vehicles.

Kerr states that this may promote an increased drive towards other fuels in LCV leasing, as petrol vehicles may be sought by some. He also says that the prospective charges could encourage some businesses to seek leasing, through selling LCVs which may not meet the emissions standards, and securing new vehicles on lease.

He says: “Some smaller companies could find it’s more cost effective to sell their old pre EU5 vehicles and lease new, clean vehicles. It could also support disposal values as these cleaner vehicles come on to the used market at three and four years old.”

As the ULEZ extension, and proposed diesel charges in London and beyond continue to be discussed, it may give the LCV leasing industry an opportunity for increased communication with customers.

Kerr says: “This is actually an opportunity for the leasing industry to work with and support LCV customers, and understand these changes and the impact it could have on their business.

“Air quality issues are firmly on the political agenda, and the leasing industry – with the support of manufacturers – can help customers run the cleanest vehicles for their business.”

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