Navigant Research Blog

How Much Will Consumers Pay for EVs?

— November 9, 2011

Recently many EV observers have been disappointed by pricing for two plug-in electric vehicles.  First, the Toyota Prius plug-in announced a price of $32,760 (including destination charge), which is about $3,000 higher than I had hoped to see.  Last week, Ford announced the Focus EV price of $39,995 (including destination charge).  Again, this price is a disappointment as I had hoped Ford, with its claimed plant flexibility, would be able to provide pricing that matched or bested the Nissan LEAF (a custom EV platform) at $37,250 (SL model).  Suddenly, $40,000 for a Volt, CODA Automotive’s $45,000 Sedan and even $57,400 for the more luxurious Tesla Model S do not seem as uncompetitive.

I have said before that the PEV market needs lower prices.  The Ford Focus EV, priced at $39,995, is $16,500 above the equivalent packaged gas-powered Focus (Titanium package).  With all the power electronics and software (inverter, charger, BMS, etc.), the motor, a 23 kWh battery pack, and Li-ion battery prices of nearly $800/kWh, these costs are not at all surprising.  Similarly, the Prius plug-in is priced about $5,400 more than a Prius Four, though these packages are not quite identical.  Again, add the power electronics, the 4.4 kWh Li-ion pack, and telematics, and the Prius’ price is about what you’d expect.  This increasingly indicates that Nissan may in fact be running a deficit on their LEAF program, despite their assertions to the contrary.  

These high prices lead to questions about the viability of PEVs for mass adoption.  While some are already speculating on the collapse of the PEV market, it is too early to claim the market as a failure.  How will the market make it past the early adopter stage and grow more mainstream?  Aside from old-school incentives, there are four main tactics that automakers can pursue:

1)      In the very near term (approximately 2012-2013), high residual values and low lease rates in the PEV market will play an important role in attracting consumers;

2)      In the near to mid-term (2012-2015), increasing connectivity and other unique features or technologies to PEVs will attract increasingly mainstream interest (Ford’s success with SYNC could be considered proof-of-concept for this);

3)      In the mid-term (2014-2016), utilizing PEVs to capitalize on credits towards government regulations for more strict fuel economy and emissions rules (for California Air Resource Board’s ZEV mandate as well as CAFE rules);

4)      In the longer-term (2015 and later), the cost of ownership of PEVs will have to become even more favorable with a combination of lower manufacturing costs, lower battery costs, stable electricity costs, and higher petroleum costs.

The disappointment in pricing for PEVs so far seems likely to be repeated as Honda, Hyundai, and VW get in the game in the next two years.  While these sticker prices may be tough for some to swallow in the early years, the real test of market sustainability will be prices for 2015 and 2016 model year PEVs.  If PEV prices aren’t starting to fall significantly as battery costs begin to flatten out in the mid-$500’s, the viability of PEVs as a mainstream vehicle will be more widely questioned. 



Dire Consequences: Exploring the Next Oil Shock

— November 9, 2011

At events such as the recent EV Roadmap 4 conference in Portland, panelists quibble about when plug-in electric vehicles (PEVs) will be ready for mass adoption, and how best to roll out the charging infrastructure.  But to understand why the PEV movement is here to stay, it only takes two words: energy security. 

The idea of reducing dependence on foreign oil has been a political stalking horse for at least the past decade.  But its impact is starkly demonstrated in Oil Shockwave, a war game-like simulation that enlists former cabinet members and other top-ranked officials to devise strategies to react to disruptions in the global oil market .  Sam Ori of the Electrification Coalition presented an abbreviated version of Oil Shockwave to the attendees of EV Roadmap.  The exercise, which explores a reduction in the flow of oil that causes the cost of to spike near $200 a barrel, was created by the group Securing America’s Future Energy and has been played out for the past 5 years at meetings of policymakers and business executives. 

In the current scenario, a terrorist attack on a major fuel processing plant in Abqaiq, Saudi Arabia, slows global oil production, and Venezuela and Iran decide to exacerbate the situation for the US and other dependent nations by simultaneously reducing their production.  None of the responses devised by the big brains during an energy summit this summer, which included political pressure on Saudi Arabia or releasing some of the Strategic Petroleum Reserve, had a tangible impact on the global price of crude oil.  The market power of OPEC, Ori explained, outweighs even the military might of the United States and exposes the country to a further potential economic crisis. 

The demonstration did not detail the local impacts of the near doubling of the cost of a tank of gas and reduced availability, but it’s safe to assume that owners of conventional cars would feel the sting much more than those who plug in for power.  In places like Hawaii, which has just a six-day supply of oil on hand, a temporary disruption of the oil supply would be devastating since the fossil fuel is used for both power generation and transportation. 

The Oil Shockwave demonstration leads to the inevitable conclusion that the only way to prepare the country for this sort of event is to reduce our dependency on oil.  Since transportation accounts for the majority of the oil consumption, electrifying the vehicle fleet is an effective means of doing so. 

This sobering assessment clarifies why the federal government has dedicated thousands of hours and billions of dollars on developing alternatives.  That PEVs today are in some cases cheaper to operate than petroleum powered cars and can provide environmental benefits that are significant but secondary side-effects. 

Government leaders from China to Canada have recognized this risk and are using a combination of incentives and mandates to ignite PEV demand.  In a free market economy, though, it’s ultimately up to the auto industry to develop vehicles that are worthy of consideration, and for consumers to buy the vehicles.  The conference also included a focus group of average consumers who were mostly clueless about PEVs.  The lack of understanding made it clear that the industry has made little progress in outlining the benefits to consumers of the convenience and fun of driving a PEV as average consumers – much less in underlining the national security risk of not shifting to electric vehicles.


The Class Warfare of Dynamic Pricing

— November 4, 2011

Dynamic pricing for electricity has long been the holy grail of the smart grid, particularly for smart metering.  The rationale is that if the retail price of electricity actually reflected the true time-based costs instead of a blurred monthly average, then consumers would become more efficient buyers, benefiting themselves, suppliers, the environment, and society.  If we can choose to buy less during demand peaks when generation costs are highest, and buy more when the grid is underutilized, then overall electricity bills will go down, peak demand is reduced, and the associated environmental impacts are lessened.  Everyone wins – so who’s to complain?

Well, quite a few consumer interest groups are complaining, ranging from the AARP to utility watchdog groups.  While some complaints fit within the ongoing smart metering paranoia, there are legitimate concerns as well, including:

  • Low-income, elderly, and other disadvantaged groups may not be able to shift to off-peak use, and hence may face higher bills. Images of grandma turning off her oxygen, shivering in the cold or sweating out a heat wave because of smart meters are persuasive.
  • There is a general assumption that consumers will happily make “comfort vs. cost” tradeoffs in energy use.  This is counter to the trend toward flat rate pricing elsewhere, including the telecom industry, heretofore the master of time-of-use pricing.
  • While there is little argument against “opt-in” dynamic pricing programs, most agree that dynamic pricing must be mandatory or implemented as an “opt-out” program to achieve the desired benefits. This muddles the message of enabling “consumer choice” via smart metering.

Underlying all these concerns is an assumption that for someone to win with dynamic pricing, someone else has to lose.  The goal may be to reduce demand peaks and fill underutilized valleys, effectively lowering the average, but it is true that some will likely pay more with dynamic rates.  The question is who?

Interestingly, opposition to dynamic pricing can be found on both ends of our politically polarized spectrum. Those toward the right fear Big Brother taking control of their thermostats and appliances (here, utilities = government). Those bent leftward see the social good of universal electricity being corrupted, leaving the vulnerable unprotected (here, utilities = big business).  I am sure smart grid advocates would love to unite Tea Party and Occupy Wall Street folks, but not this way!

These complexities abounded last week when I attended the New England Restructuring Roundtable, a group that since 1995 has been meeting several times a year to discuss “revolutionary changes in the electric power industry in Massachusetts and throughout New England.”  This meeting included a terrific panel of leading utilities, regulators, and consultants on the topic of smart grid and dynamic pricing. Among these were Oklahoma Gas and Electric (OG&E), which has an impressive smart grid program underway, and Ahmad Faruqui of The Brattle Group, presenting evidence from a multitude of dynamic pricing pilots.  The data show that not only does dynamic pricing work, but there are clear guidelines for how “dynamic” the pricing should be, and how consumer technology enhances the benefits.

Much of the Q&A centered on the “Who wins, who loses?” question.  What I think has been missing from the broader debate, is the question, Who wins/loses in the status quo of average rates?  Clearly heavy peak users are effectively being subsidized by everyone else.  Efficient users are subsidizing inefficient users. Using class-bias stereotypes, McMansion-owning consumers running heavy-duty HVAC systems, pool filters, and hot tubs regardless of peak periods are being subsidized by other, less power-hungry ratepayers, including grandma just trying to stay warm (or cool).

In this context, consumer advocates should be clamoring for the “peakers” to “pay their fair share.”  And more capitalistic types should welcome systems that make energy a free market with more consumer choice and effective pricing mechanisms.  Of course, programs are likely needed for disadvantaged groups, but this is nothing new.  And there is evidence that even low-income consumers are often able to respond to dynamic pricing incentives and share in the benefits.

Ultimately, regulators and legislators, armed with increasingly better data from pilots and carefully considered consumer protections, will need the courage to drive dynamic pricing implementation.  With smart meter deployments now reaching critical mass, technology will no longer be an obstacle.  And perhaps fairness and markets will converge toward the same goal.


Puncturing the Energy Storage Bubble

— November 4, 2011

As the recession lingers on I’ve seen a shift in focus in the cleantech industry, as measured, at least, by industry buzz and conference attendance.  The plethora of conferences addressing smart meters, smart cars, smart this and smart that, has essentially petered out.  While anything connected to the “smart grid” was the buzz just over a year or so ago, now the hottest topic, at least within my areas of coverage, is smart storage.

In order to enable microgrids – little islands of self-sufficient power powered by the wind and sun – truly commercially viable, lower cost storage is absolutely necessary. Pike Research recently released an Energy Storage Tracker, from which the following chart was derived.

However, when it comes to wholesale markets, where variable wind and solar farms can benefit from balancing resources scattered through a utility distribution grid, the need for storage has been overblown due to simplistic thinking. Evidence of this fact was provided by Mark Kapner, director of engineering at Frontier Associates, and formerly senior strategist for Austin Energy. On a panel at the recent Smart Energy International (SEI) conference, in San Francisco, devoted to highlighting the value of advanced energy storage – which consist primarily of new kinds of batteries, flywheels, supercapacitors and less sexy technologies such as pumped hydro storage – Kapner played devil’s advocate by supplying the following facts:

  • Texas had a peak load of roughly 67 gigawatts (GW); yet its off-peak load at night is closer to 25 GW.
  • Texas currently has roughly 10 GW of wind capacity on-line, and that is expected to grow to 18 GW within the next 5 years.
  • Even at 18 GW of wind, little (if any) storage will be required to meet the nighttime load of 25 GW, as controls of conventional natural gas fired generation are flexible enough to smooth out the supply portfolio.
  • While a microgrid totally dependent upon variable distributed wind and solar would not be viable without some form of storage, Texas is often supplying up to almost a third of its total electricity from wind farms in the dead of night with only a token amount of storage. According to Kapner, over half of nighttime loads will still be able to be powered by the wind without a single new battery or other form of storage.

In the Midwest market controlled by the Midwest Independent System Operator (MISO), short-term storage technologies also play a minimal role, with 1 MW of battery capacity being operated by Xcel Energy, whereas 7 GW of wind power is now online within MISO’s control area. However, long-term storage plays a larger role here than in Texas, as conventional pumped hydro storage resources units totaling ~2 GW located near Lake Michigan are controlled by the utilities and adjusted seasonally, instead of an hourly basis, as is the case with short-term storage.

Does this mean storage is hoax? Absolutely not! The problem today is that regulators have not yet figured out how to compensate for wider energy storage, let alone integrate storage into the resource planning process. The current system of ramping fossil fuel units up and down is not a long-term solution. And at present, states such as Texas are building way too much transmission capacity than is necessary. Part of this is due to regulations. Unlike many other markets in the U.S., transmission lines are not paid for by wind farm developers in Texas, but rather financed on the backs of ratepayers. (Yes, Texas is guilty of “socializing” the cost of transmission.) Utilities therefore don’t mind constructing transmission. To optimize this large, islanded, wholesale market Texas regulators should facilitate a market that allows strategic storage to compete against investments in transmission.

At the SEI conference I also attended a panel on microgrids, where I learned a few interesting items from Craig Lewis, executive director of the CLEAN Coalition. Lewis highlighted two municipal utilities that are setting the stage for future microgrids through new feed-in tariffs (FIT), a novel twist on how to promote the microgrid solution via public policy. One is Fort Collins, Colorado, which hopes to add 40 times its current solar PV capacity on the utility side of the meter within two years with a program that only increases rates by 1%. The other is the municipal utility in Palo Alto, California, which hopes to boost on-site power supply from primarily solar PV to 20% of its total supply. Once the utility reaches that threshold, Lewis says the utility hopes to be able to create a microgrid that spans its entire service territory, relying upon demand response technologies to shrink demand down to only vital loads.

This week voters in Boulder, Colorado approved the creation of a municipal utility that will place greater reliance on renewable sources and could implement similar technologies to manage demand and increase efficiency.

As the Pike Research Microgrid Deployment Tracker points out, few “community/utility” microgrids are currently on-line in the U.S. Interest is growing, however, and with the right public policies in place, such systems will become more common – but not before the 2017-2020 timeframe.


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