What Boards of Directors Need to Consider in the EV Transition

Canada is undergoing a monumental shift to the production and adoption of electric vehicles (EVs) and the effects are being felt beyond the automotive, mining and energy industries. Boards need to consider how the rapid transition to EVs will affect their companies and what new regulations and incentives could mean for them. There will also be new opportunities as charging networks are built and businesses include EVs in their ESG policies.

National EV Sales Targets

EVs are critical to Canada's plans to achieve net zero emissions by 2050. The proposed federal Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations sets annual sales targets for new light-duty zero-emissions vehicles offered for sale in Canada—at least 20% by 2026, at least 60% by 2030 and 100% by 2035.

What Tax Incentives Are Available to Your Company?

There has been a wide range of new incentives in the past year to support the EV transition for mining, automotive, clean energy, manufacturing, and technology companies. These include:

• Critical Mineral Exploration Tax Credit—30 percent tax credit for targeted critical minerals available to investors under certain flow-through share agreements.
• Clean Technology Manufacturing Tax Credit—30 percent refundable tax credit for investments in new machinery and equipment used in certain clean technologies, or extracting, processing, or recycling key critical minerals.
• Clean Electricity Investment Tax Credit—15 percent refundable tax credit for eligible investments in clean electricity, including technologies required for the generation and storage of clean electricity and its transmission between provinces and territories.
• Subsidies for EV battery production—Ontario and the federal government are partnering to invest billions of dollars in subsidies to create a domestic EV battery industry.

Impact On a Company's Vehicle Fleet

Incentives, tax write-offs and credits

The federal Incentives for Zero-Emission Vehicles (iZEV) Program provides up to $5,000 toward the cost of buying a light-duty vehicle—and has been broadened to capture larger ZEV models.

There are also federal tax write-offs for all businesses to purchase EVs. Businesses that receive an incentive from the federal iZEV Program cannot use the tax write-off for ZEVs.

Provincial and territorial EV purchase incentives are available in British Columbia, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland, Northwest Territories and Yukon. These can be combined with the federal iZEV incentive. 

Canada's proposed Regulations Amending the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations would establish a compliance credit system to determine if manufacturers' and importers' fleets of vehicles for sale in Canada meet the ZEV sales target for a given year. If a manufacturer or importer surpasses its target, it earns excess compliance credits. If it misses its ZEV sales target, it would be in a compliance deficit and would need to purchase credits.

Right to repair

Boards should be following the widely anticipated "right to repair" legislation that is drawing increasingly closer to becoming law in Canada. It is expected to have a big impact on the auto industry, the automotive repair industry and owners of EVs.

An Act to amend the Copyright Act (diagnosis, maintenance and repair) would reduce the ability of original equipment manufacturers (OEMs) to lock access to in-built, and embedded software, where the access is necessary for diagnosis, maintenance and repair of products and equipment.

Charging Infrastructure

Meeting the national ZEV adoption thresholds requires a significant build-out of Canada's charging infrastructure. Millions of public chargers will be required for 100% ZEV sales. Companies with EV fleets need to be sure the network is keeping up with their vehicle purchases and unique needs.

The commercial real estate sector should be thinking about the siting of chargers in both existing and new buildings. In May 2023, the B.C. government passed legislation to enable strata corporations and owners to install EV charging infrastructure more easily. Several jurisdictions in Ontario have adopted new bylaws to support EV charging.

The standardization of charging stations is a hot topic in EV adoption. Canada does not currently have federal performance and reliability standards for EV chargers. In the private sector, numerous auto makers have announced they will adopt Tesla's NACS charging standard to gain access to its Supercharger network in Canada and the U.S. In late July 2023, seven major automakers including GM said they were forming a new company to provide electric vehicle charging in the U.S. and Canada.

Bidirectional charging (V2G, V2H, V2L, and V2X) for EVs is in its nascent stages in Canada. The technology creates a new form of energy storage by allowing cars to both be charged and be a source of electricity—that could be used by businesses and households with EVs to supply electricity for their own use (e.g. during peak pricing periods or during blackouts) or could be sold back to the grid. It is a potential avenue of revenue generation or expense reduction that can further reduce the total cost of ownership of EVs vs. internal combustion engine (ICE) vehicles. 

The Matrices Of B2B Contracts

The EV transition will involve the integration of all kinds of companies and investors on different projects—some who have never worked together closely or even at all.

OEMs are developing completely new relationships with mining companies through big investments, joint ventures, and acquisitions. EV charging technology companies are working with charging station operators who themselves have digital terms and conditions with drivers. And of course, there are the power companies providing the electricity. Complex new, and overlapping, legal relationships are emerging regularly for companies as the EV transition advances, requiring careful consideration by their Boards of adequate risk allocation. 

Product Liability

With a transition in technologies comes a transition in product liability risk. Compared to ICE vehicles, EVs have significantly fewer mechanical parts to fail and require significantly less maintenance. Early concerns about EV battery durability and fire risk have thus far been shown to be largely misplaced. At the heart of an EV is software, and increasingly software can be updated relatively quickly "over the air" without the owner ever having to visit a mechanic, and without the significant design, validation, and distribution activities associated with a hardware fix. There should be fewer product defects, and any defects can likely be repaired quickly and easily. It is expected that the risk profile of EVs will be significantly less than that of ICE vehicles. That also means higher uptime for fleet operators.

How Do EVs Fit into A Company's ESG Planning?

Depending on a company's operations, EVs may have an important role in achieving corporate-level net zero requirements and targets. Yet choices in EV deployments, including vehicle model and charging infrastructure selection, can have significant effects on overall outcomes. Ideally, Boards can start with a full life cycle analysis of their company's EV plans to see how they fit in with their company's overall ESG story. Important things to consider include where the raw minerals for batteries come from and then refined. Cobalt is a good example. About 70 per cent of the world's supply is mined in the Democratic Republic of the Congo and China dominates refining with a three-quarter share of global production, raising potential ESG risks.

Canada, the United States, and the EU are all hard at work to increase their output of cobalt and other critical minerals to address this kind of imbalance.

Boards should also know if their EV fleet will be charged by electricity from green power or fossil fuels, and how they will handle the recycling of EV batteries—in all the jurisdictions they operate in.

EVs offer companies a unique opportunity to improve ESG metrics and reduce costs. Large fleet operators have reported double-digit reductions in the cost of ownership and operation by making the switch from ICEs to EVs, and this is without a full life cycle of data. What's more, drivers and customers are happier because of the positive impact on the environment. Making the switch from an ICE fleet to an EV fleet requires careful study and analysis to avoid unforeseen downtime initially. But there is tremendous potential long-term gain from that short-term pain.

A Challenge and An Opportunity

Canada's shift to EVs offers companies an opportunity to reduce their greenhouse gas emissions intensity, and potentially to reduce costs and modernize operational processes. Such a major transition is not, however, without its risks. Boards should anticipate active stewardship of EV issues to mitigate these risks as a new normal in Canadian business.

Michael Smith and Sander Grieve are partners in Bennett Jones' Toronto office. Sander is also Head of the firm's Mining Industry Team. Duncan McPherson is a partner in Bennett Jones' Vancouver office.