1.6.1 - An economic model for electric vehicles

Version 3


    The basic economics


    No matter how impressive it is, new technology can only be a success if its price is acceptable by the market. Despite the cost reducing all the time, most electric vehicles remain more expensive than internal combustion vehicles. In addition to promoting new travel habits, a new economic model needs to be created in order to develop this technology, which many people class as disruptive.


    A viable economic model


    The viability of the economic model depends heavily on the operating context: gas prices, emissions regulations, safety, tax regimes, start-up costs, cost and investment risks. It will rely on joint actions by the authorities, manufacturers, equipment manufacturers, users and energy suppliers. Several key factors have been identified for setting up an economic model for electric vehicles.

    Infrastructure: The support of the authorities in the construction of the necessary infrastructure (particularly electric charging and hydrogen fueling stations) will reduce the cost for the consumer and solve the chicken-and-egg dilemma.

    The overall investment required in new technologies may seem enormous but it needs to be compared with the cost of inaction to understand the actual profitability. Experts estimate that public investment in ten years' time would cost 5 to 20 times more than if it was made today. The cost of inaction can be assessed in terms of the estimated increase in cost per metric ton of CO2: from 20 dollars in 2010 to 50 dollars in 2020 and 110/180 dollars in 2030. With that in mind, investing now in infrastructure which would reduce greenhouse gas production would certainly be a shrewd mid-term investment.  Where road safety and climate are concerned, the necessary investment would be more than offset by savings on the results.

    But the authorities cannot foot the whole bill, other investors are needed such as electricity or hydrogen suppliers and other service providers.

    Financing: Robust financing plans are crucial for large-scale commercialization in order to offset the initial investment as much as possible. They may be based on the fuel economy offered by electric vehicles (by transferring these savings to the initial costs) - but the monthly cost of using EVs also needs to be competitive.

    Return on investment: In the case of commercial fleets in particular, return on investment needs to be rapid - generally no more than 2 years.

    People who travel a lot should be an important market. The further people travel, the higher their fuel requirements are and the faster the return on investment will be (due to the price differential).

    Promising niche markets: Rental vehicle fleets and bus operators may accept a slower return on investment. Taxis may benefit due to the distances covered but need to be able to quickly recharge (or exchange) their batteries or hydrogen tank.

    Carpooling/shared vehicle ownership could also be a growth market if the cost per user or mile is competitive. Intensive, therefore economical, use of the vehicle (compared with the price of traditional fuel) is a benefit for users of co-owned vehicles and carpooling service providers.

    Batteries are the key to a viable economic model. The cost must be a maximum of €225/kWh to achieve an initial reasonable vehicle cost. Longer distances and lifespan will also be highly important for consumers. The residual battery value must be fixed early enough and integrated into the initial price. The table below shows the breaking points of batteries for different applications.

    Hydrogen for fuel cells: CAPEX for an H2 station is lower than €250,000 per 100 kg/day. OPEX for an H2 station at a CNG station including production and transportation: less than €6/kg.


    The sides of the equation


    Oil prices and subsidies

    Predicted oil prices should partially offset the difference, at least in certain parts of the world as gas and diesel are still subsidized in many countries. An IMF study showed that annual worldwide fossil fuel subsidies total around 1% of the world's GNP! It is encouraging to think that at the Pittsburgh summit, the G20 expressed a desire to see an end to these practices.


    Non-financial measures


    There are many non-financial incentives which can boost the electric vehicle market including benefits for buyers such as access to city centers which are off-limits to high-polluting vehicles, increased axle loads, parking, access to delivery areas, access to special lanes and lower toll charges, etc.


    Integrating externalities


    In order to support the emergence of sustainable solutions, each technology needs to cover some of the costs it imposes on the community and thus includes externalities in its prices, i.e. the positive or negative impact of activity relating to this technology on elements not involved in this action. The carbon emissions tax should come into its own here. If set correctly, the price per metric ton of CO2 emitted could help to steer technological choices. The IEA predicts a price of around 110 constant dollars per metric ton by 2030. In the IEA's "World Energy Outlook" (2009), the 450 scenario assumes that the price per metric ton of carbon will reach 50 dollars (in OECD countries) by 2020.

    Valuation systems will then inevitably emerge, estimating the whole environmental impact of an activity in order to put a price on damage to ecosystems, similar to what already exists in the form of environment taxes in sectors such as water distribution and purification.


    Economic model for manufacturers

    The economic model for manufacturers is set to change if only because some parts of the vehicle, such as batteries, may cease to belong to the buyer of the vehicle (installment plan, leasing or battery exchange), because the proportion of fleets may increase significantly in comparison with privately-owned cars and because electric or communicating vehicle maintenance is different. Periodic updates will require a more modular design of vehicles. Car-sharing and self-service schemes will result in vehicles being used more intensively. Fleets will need to be renewed more often, which is now a dynamic market despite the low growth in volumes. Some new players will develop in the services market.

    For the user, the notion of costs traditionally associated with owning and maintaining a private car will gradually be replaced by the price of using transport. This revolution is underway.

    Copied in "Ateliers Berlin" 2011 p7


    V2G (vehicle-to-grid) technology


    One of the main advantages of EVs is that they are clean, in that their electricity networks use clean and renewable sources of energy. But the disadvantage of renewable energies is that energy that is not used straight away cannot be stored. For example, the wind is stronger at night when consumption is at its lowest so the energy capacity is underexploited.
    EV batteries can make use of this energy in two ways

    • First of all by recharging at night with cheaper electricity and using the renewable energy production surplus. This model benefits both electricity suppliers, who receive additional revenue, and consumers, who reduce their "fuel" costs.


    • The second way is the use of EV batteries to store electricity. If a battery stores enough energy to travel 85 miles (24kWh) and the daily journey is only 40 (12kWh), the owner can sell the surplus during the day when demand is highest. In this model, the consumer makes a profit by reselling energy: their vehicle pays its way even if it is stationary two-thirds of the time!
      Widespread use of this technology may increase network capacity and reverse the daily electricity demand curve, as is the case in Denmark for example.

    V2G is also a good way to recycle batteries. Batteries reach the end of their life on the vehicle when they have lost 20% of their original capacity. But even when 80% charged they have a decent storage capacity for the grid. The battery thus has a second life and provides an additional source of revenue for the owner who secures a return on investment by selling electricity back to the supplier.

    Bi-directional chargers are required to do this. The current process penalizes the lifespan of batteries as 3kW/230 VAC sockets are not powerful enough for the grid. To achieve the target capacity of 22 kW (400VAC), it would take 6 to 7 years to offset the cost of the 25 kWh battery with a bi-directional charge.

    Another issue is the ability to communicate with the grid to block the transfer of power in order to conserve the power needed for traveling.


    Copied from "Ateliers Berlin" 2011, p11


    What is the market for electric vehicles?


    EVs will be offered by various market segments with different characteristics and reasons. There are at least three groups of users with varying needs and interests:

    Early adopters: Probably high-end vehicle purchases, with a significant subjective factor. These consumers will be prepared to pay more, return on investment (in terms of fuel economy) will not be important but quality will be primordial in order to justify the investment in terms of the project and their image.


    The mass market: These buyers are price sensitive and probably also used to making long journeys. The initial acquisition cost must be comparable with that of competing technologies. Sales could take off in budget and niche applications.

    New economic models could emerge such as carpooling, co-ownership, pay-per-mile and battery exchange schemes. Discounts on the purchase price and a range of non-financial benefits will be necessary in order to develop the market enough to substantially decrease the initial cost. Sales support plans must be implemented in the long term then reduced gradually. It will be this market in particular that demands a good balance between autonomy and cost.


    Commercial and public fleets: The driver will be essentially economic (as long as vehicle specifications are adapted to predicted uses). The initial cost of high-turnover vehicles must be offset very quickly and fleet operators will be concerned about residual value. Some segments (buses?) which are early technology adopters may be able to withstand longer offset periods.
    Additional (non-financial) benefits may be deciding factors such as higher payload limits and access to city centers, delivery areas and priority parking spots. For the mass market as well as commercial fleets, the offset period is crucial. One approach would be to spread initial costs over monthly payments.


    Does the new economic model already exist?


    Some applications already have their economic model but we need to expand the situations in which this economic model works. We also need to be better informed in order to understand consumers and market segments to find out when, where and how to develop large self-sustaining markets.


    Unpredictable factors


    Although we know some drivers for "electrified" transportation development such as reduced taxes, other influence factors are still difficult to predict in terms of the extent of their effects. Changes in human behavior, habits and mentalities can increase interest in electric and hybrid vehicles. The increasing number of female users of transport, the average aging of the western population, the digital explosion in everyday life, the questioning of the ownership instinct and raised awareness of 21st-century environmental issues are all factors which can influence developments in this sector of activity.

    According to a study conducted by Roland Berger Strategy Consultants, illustrated in the graph below, the energy shift in vehicle propulsion is just beginning. The graph shows that the current cost of the total lifespan of an electric car is around a third of that of an equivalent internal combustion vehicle.


    Source: CB Booklet "Let’s drive electric", page 24


    In the future, we can imagine that changes in conception and mass production will drive costs down and at least reach break-even point. Worldwide production capacity is expected to reach 1 million batteries a year by 2015. Economies of scale should ensure strong, sustained expansion in the sector as well as continued development.

    Charging infrastructure is being set up in various countries according to the increasing number of EVs on the roads.