Electric vehicle (EV) sales and market share growth are rising in the U.S., although not as fast as in other global markets such as Europe and China (see chart 1). In 2023, U.S. battery electric and plug-in hybrid EV (BEV and PHEV) sales grew approximately 51.0% year over year, expanding the EV market share to 9.1%. BEVs accounted for much of the recent growth and represented approximately 80% of total U.S. EV sales in 2022 and 2023 (see chart 2). Tesla held about 60% of the EV market share both years.

S&P Global Ratings believes these trends will likely continue due to rising consumer confidence in EV technology, available government subsidies, increasing manufacturer and finance company incentive offerings, and forthcoming regulations that are set to limit the production of internal combustion engine (ICE) vehicles and perhaps accelerate over time as infrastructure catches up and technology improves. While we have yet to see any sustained or sharp increases in the concentration of EVs in U.S. auto lease asset-backed securities (ABS) collateral pools we rate, we expect the rising trend could impact the pools' vehicle recovery values.

However, we also forecast the pace of U.S. EV sales growth slowing to 25.0% in 2024, with market share ticking up to 11.5%. After stronger-than-expected auto sales in 2023, at 15.4 million units, we expect flattish volumes in 2024 as high interest rates and inflationary pressures continue to weigh on consumer purchasing power and limit U.S. auto sales growth. In addition, the second half of 2023 saw a slight slowdown in market share growth for BEVs and rising inventories for certain models. High vehicle prices, ongoing inflation, and higher interest rates continue to weaken consumer purchasing power and limit retail auto sales, including EVs. Rising inventories for several EV models may indicate slowing demand, and several automakers have announced plans to reconfigure BEV production to better control inventory levels and minimize price wars, which may take place through 2025. Conversely, this could all lead to more affordable EV offerings through 2025, fueled by manufacturer subsidies, tax credits, and manufacturer's investment in local supply chains.

Lease financing could drive much of the EV sales growth this year. We believe the "leasing loophole" under the Inflation Reduction Act of 2022, which became effective Jan. 1, 2023, could make consumer EV purchases through leasing a more viable and economical option to ownership. In the near term, as EV concentrations rise in auto lease ABS transactions, residual value risk could increase, especially in the backdrop of constant EV price swings. Overall, we expect EV leasing rates to increase in 2024; U.S. auto lease ABS ratings performance to remain stable, given the relatively low EV concentrations in the rated auto ABS pools; and consumer EV adoption concerns to gradually ease over time.

As new EV sales increase and more manufacturers and models enter the market, more residual value performance data on EVs will become available, providing a more robust data set to better inform our analytical assumptions.

Chart 1

Chart 2

Not There Yet

Widespread EV adoption faces significant challenges in the U.S. While there are many positive reasons for an EV purchase, including driving experience and performance, fuel savings, and environmental benefits, consumers cite several key barriers to purchase. These include EVs' lack of charging infrastructure, higher vehicle costs, and limited travel range.

Infrastructure and charging

Access to charging points is often cited as a key barrier to EV adoption. While charging infrastructure has grown significantly and is expected to continue doing so, more charging points are needed to support increasing EV sales (see chart 3). The number of publicly accessible charging stations varies greatly by state, with California accounting for nearly 25% (approximately 50,000 stations) of the country's total charging infrastructure (see chart 4). The states with next three highest counts--New York, Florida, and Texas--account for only about 30,000 stations combined.

Further, the mix of charging station types available isn't keeping up with demand for long-distance travel, effectively limiting EVs' travel range. Direct current (DC) charging stations are more popular with individuals who travel long distances because they offer the best range-to-charging time ratio. However, as shown in chart 3, alternating current (AC) chargers, which require longer charging times, are the most widely available with a deployment growth rate that is many times faster than the DC segment.

Chart 3

Chart 4

Vehicle costs

New EVs have historically, on average, had a much higher sticker price than their ICE counterparts, and this has been one of the primary deterrents to new EV purchases (see chart 5). However, that price gap narrowed significantly in 2023. The introduction of the Inflation Reduction Act in January 2023 and related EV subsidies, Tesla's drastic price cuts on its new models, and the availability of more new entry affordable models have driven up the average transaction price for EVs. As of December 2023, the average price for new EVs was $50,798, compared to $48,759 for a typical new ICE vehicle.

Chart 5

Battery

Batteries represent about 30%-50% of the EV price, making them the most expensive component (see chart 6). As a result, EV batteries' replacement cost and ongoing viability and longevity, which may be significantly affected by consumers' charging behavior, weather, and temperature, are key concerns for consumers, especially for used EVs.

With economies of scale, supply chain improvements, and technological progress, original equipment manufacturers (OEMs) are reducing production costs and improving the quality of their EV offerings, such as through increased range. These manufacturers have invested significantly in battery production as they seek to lower costs and diversify their supply chains, which currently rely heavily on battery imports. Lower production costs could result in more affordably priced new vehicles, which may help to increase consumer demand for EVs.

Chart 6

EV sales are benefitting from government subsidies (particularly those set forth by the Inflation Reduction Act) and state regulations that limit the sale or production of ICE vehicles. We also believe state and federal governments will continue to invest in public infrastructure (i.e. public charging stations) to support EV growth.

The Inflation Reduction Act allows consumers and businesses to claim a tax credit of up to $7,500 when they purchase a "qualified" new electric vehicle that meets a set of nuanced criteria. To claim the full $7,500 EV tax credit on a new BEV or PHEV, the vehicle must meet specific criteria related to where the EV's battery components are manufactured, where the battery's critical minerals are extracted and processed, and where final vehicle assembly occurs. For example, in 2024, tax credit-eligible vehicles may not contain any battery components produced by a "foreign entity of concern" and 50% of the value of the battery's critical minerals must be processed or extracted in the U.S. or a country that has a free trade agreement with the U.S. In addition, the vehicle's manufacturer's suggested retail price must be within the eligibility caps ($55,000 for cars and $80,000 for SUVs, trucks, and vans), and the buyer's adjusted gross income cannot exceed $150,000 or $300,000, depending on tax filing status.

The available EV tax credit for a used model BEV or PHEV purchase is up to $4,000, with no restrictions on where the vehicle was assembled or where its battery components came from. However, the income caps are lower, ranging from $75,000 to $150,000, the vehicle itself must be at least two years old and cost no more than $25,000, and the vehicle must be purchased from an auto dealer and not a private party.

The new EV tax credit guidelines under the Inflation Reduction Act have made numerous EV models ineligible for the EV tax credit and some eligible models potentially more desirable. However, commercial EVs are exempt from many of the manufacturing eligibility requirements. The U.S. Treasury Department defines leased EVs as commercial vehicles because lease contracts are viewed as a commercial transaction, and the lessor retains ownership of the vehicle's title. This commercial designation significantly increases the number of EV models that are eligible for the tax credit, provided those models are leased to consumers and not sold outright. Auto dealers and captive auto finance companies can claim the EV tax credit each time they lease a new EV, and some or all of the $7,500 credit could be knocked off the vehicle price and passed through to the consumer as cost savings.

We believe this "lease loophole" will spur demand for EV leasing in the near term. Indeed, EV leasing has ramped up since the U.S. Treasury announced the tax credit, which became effective Jan. 1, 2023. EV leasing rose to almost 24% of retail EV sales in the nine months ended October 2023, compared with less than 10% before the announcement, according to Cox Automotive and Kelley Blue Book. This ratio is also higher than the 18.6% industry lease penetration rate for all U.S. retail auto sales for the same period. We expect EV leasing rates to continue increasing in 2024.

Price Reductions Wreak Havoc On EV Residual Values

Numerous studies in the automotive sector, including ones conducted by IseeCars and Kelley Blue Book, have shown that residual values for EVs and more specifically, BEVs, are generally lower than those for their ICE counterparts. The significant price reductions for new EVs can also have a material negative impact on older EV models, as observed in recent used EV price trends. This exposes auto ABS transactions backed by EV receivables to heightened residual value risk, where applicable, and lower recovery prospects.

EV consumers are benefitting from improved technology, new EV price cuts, tax credits, and more lower-priced models. However, market research studies using data from fourth-quarters 2023 and 2022 have shown that used EV prices fell roughly 30% year over year in 2023. In contrast, overall used vehicle prices, including ICE, hybrid, and EVs fell by around 5%. The significant decline in used EV resale values exposes leased EVs to heightened residual value risk.

Since Tesla has a dominant share of the U.S. EV market, the company's actions can have a material impact on the overall market. In 2023, Tesla implemented price adjustments, mainly cuts, on new EVs, which helped the company increase sales but caused older models to immediately lose 20%-40% of their value as consumers opted to purchase the more affordable new models. Tesla's actions also forced other auto manufacturers to lower their EV prices in order to stay competitive. Further, the introduction of the $7,500 EV tax credit for new cars in January 2023 had an immediate adverse impact on used EV values almost dollar for dollar. As a result of these factors, used EV inventory levels rose in 2023, averaging 113 days' supply by year end compared to the industry average of 69 days for ICE vehicles.

Residual Value Performance In ABS Securitizations

The U.S. auto lease ABS transactions we rate continued to experience healthy residual value gains over the pools' securitization values in 2023 (see chart 7). Much of the positive residual performance was due to the industry's strong used vehicle market and low off-lease vehicle return rates since the second half of 2020. Off-lease vehicle return rates fell to single digits in 2022 but has recovered somewhat since.

Chart 7

EV concentrations in the auto lease ABS pools we rate has been very low and, up to 2023, has generally not exceeded 10% of the pools' total base residual, which is in-line with our criteria benchmark pool (see chart 8). The percentage of EVs in the ABS pools have generally reflected market trends. The low mix of EVs, especially BEVs, in our rated pools helped to mitigate for possible negative impact on residual values. Given the expected rise in EV lease utilization, we expect the concentration of EVs will also rise in the 2024 ABS pools.

Chart 8

Our Analytical Approach To Stressing EV Residual Values

Most of the risk in auto lease ABS is related to residual value risk, or the risk that the leased vehicle will be worth less than its base residual value at the end of the lease term when it is returned to the dealer. If the purchase price (usually the market price) for the vehicle paid by the grounding dealer, the broader dealer network, or at auction is less than the leased vehicle's base residual value, then the ABS trust could incur a residual value loss on the lease.

Credit loss in auto lease ABS is secondary and a much smaller portion of the overall loss because most lessees in these lease pools are of high credit quality, as measured by the pools' weighted average FICO score range of 760-798. The likelihood of lessee default in these ABS pools is considered relatively low.

In our analytical approach for assessing residual value risk in auto lease ABS transactions, there are several rating-specific stressed residual value haircuts (categorized in steps) that we may apply to determine our stressed residual loss for the auto lease ABS pool (see chart 9).

Chart 9

We also highlight below three key steps that may be more directly relevant to an auto lease pool with a higher concentration of EVs.

Step 1

Once we have determined the portion of the securitized asset pool that may be subject to market value risk at lease return, based on our rating-specific stresses, (e.g., 100% of the assumed nondefaulted lease contracts under a 'AAA' stress scenario), we apply a rating-specific initial haircut to the undiscounted base residual value as outlined in our criteria.

Step 2

From there, we assess the pool's undiscounted base residual value (as defined within the transaction documents), the residual characteristics of the top model concentrations in the pool, the assumptions factored into the models' residual value forecast, and any other factors we believe could influence the pool's base residual value. We then adjust (increase or decrease) the initial haircut, if we believe it's warranted. Our considerations include, but are not limited to, the following:

• The third-party forecaster of residual values that are usually included in U.S. auto lease ABS transactions. We assess the forecaster's track record and historical accuracy in forecasting residual values. Where available, we review the third-party's forecasts against historical actual used vehicle values for at least the top 75% of the most concentrated makes and models to determine the level of accuracy. We consider the basis for any differences between the historical actual used vehicle values and the forecast. If we believe the residual value forecast has historically not been accurate and we view the impact on residual value risk to be material, we may increase the initial base residual haircut. Where available for EVs, we assess the residual value forecast for the EVs in the pool and compare it to the vehicles' actual used value. This analysis becomes more critical as the EV concentration in auto lease ABS pools grows beyond the benchmark pool specified in our criteria.
• Whether the residual value forecast (base residual value) sufficiently reflects current macroeconomic and market sentiments that may adversely affect residual values at lease term end (i.e., current mark-to-market). If not, and if the mark-to-market value shows a potential downward drift in residual values, we adjust the base residual value downward or increase the initial haircut appropriately. We may conduct this analysis by model concentrations, including EVs, and make adjustments by model if we deem it appropriate.
• How does the EV's forecasted future value compare to historical actual values? What is the basis for the difference in values, if material? How does the forecasted values compare to that of ICE counterparts? What are the drivers to residual value fluctuations?

The auto lease ABS transactions we rate use the residual value estimates produced by third-party forecaster, Automotive Lease Guide (ALG), to set the base residual value in the securitizations. The base residual value of a specified vehicle in these securitizations is typically defined as equal to the lowest of three values:

• The residual value estimate established by ALG at the time of lease contract origination,
• The current ALG residual value estimate (mark-to-market), and
• The stated residual value in the related lease contract.

The lowest of the three values is usually the first or second listed. By definition, any expected market value changes of the vehicle at lease maturity from the time of lease inception would be factored into the transaction's base residual value calculation. Including the "lowest" of these values would cause the defined base residual value to be reduced for any expected market value declines but not increase for any expected rise in market value.

According to ALG, it typically sets the residual value of BEV vehicles by taking the residual value of a comparable ICE model and adjusting it (higher or lower) for content, performance, range, scarcity, and pricing. Based on its historical accuracy reports on auction returns through December 2023 for EV model years 2016-2020, ALG's residual value estimates have been equal to or lower than the vehicle's actual retention value.

Step 3

We then apply an additive haircut (the excess concentration haircut) to the initial base residual value haircut if the lease pool exhibits certain concentrations above the benchmark pool as described in our criteria (see table). The benchmark pool limits EV (PHEV and BEV) concentrations to 10% of the lease pool's base residual value. Any EV concentrations in excess of 10% will be subject to rating-specific excess concentration haircut that will be added to the initial haircut. More than one excess concentration haircut may be placed on the same vehicle model if it exceeds more than one benchmark pool concentration limit (e.g., an all-new model EV).

Related Criteria

• Global Auto ABS Methodology And Assumptions, March 31, 2022
• Sector And Industry Variables | Criteria | Structured Finance | ABS: Global Auto ABS Methodology And Assumptions, April 28, 2023

Related Research

• Tougher Pricing Conditions in 2024 Could Cramp U.S. Auto Sector Ratings Headroom, Feb. 12, 2024
• Global Structured Finance 2024 Outlook, Jan. 10, 2024
• Industry Credit Outlook 2024: Autos, Jan. 9, 2024
• Sustainability Insights: Electric Vehicles Amp Up European Auto ABS Risk, Nov. 29, 2023