Canadian Auto ABS: The Transition to an Electric-Powered Vehicle Fleet

Morningstar DBRS published a commentary examining the progress made and hurdles encountered as the Canadian vehicle fleet transitions to electric power. We also look at how this changing fleet composition will affect Canadian auto loan and lease asset-backed security (ABS) pools.

The key highlights discussed include:
-- Zero emission vehicle (ZEV) sales accounted for 10.8% of new light vehicles registered in Canada in 2023, continuing the trend of year-over-year growth since 2017.
-- The ZEV sales mandates—requiring that 100% of light vehicle sales in Canada be ZEVs by 2035, with interim sales targets of 20% by 2026 and 60% by 2030—will likely result in ZEVs making up a progressively bigger proportion of Canadian auto loan and lease ABS pools.
-- In the short term, this may expose Canadian auto loan and lease ABS transactions to additional risk as historically ZEVs have tended to retain less of their value compared with their internal combustion engine (ICE) counterparts.
-- There are still many hurdles on the road to mass adoption of electric vehicles (EVs)—chief among them are range anxiety and the lack of charging infrastructure.
-- Relative affordability also remains an obstacle to the mass adoption of ZEVs. For the majority of original equipment manufacturers, EVs remain considerably more expensive to manufacture than ICE vehicles.
-- Ongoing improvements in battery technology and innovation in manufacturing methods should see the price gap between ZEVs and ICE vehicles continue to narrow.

“Over the longer term, countries like Norway, Sweden, and Iceland have shown that ambitious ZEV penetration rates are possible,” said Simba Murahwi, Vice President, Canadian Structured Finance Ratings. “With such high penetration rates, ZEVs would become the dominant force in the Canadian vehicle fleet. This will ultimately result in weaker value retention for ICE vehicles relative to comparable ZEVs.”