Navigant Research Blog

Oil Price Retreat Could Spur Government Action

— February 24, 2015

Although the oil market has been historically volatile, the circumstances of the latest price dive suggest that low oil prices may be the new norm. If that’s the case, it could negatively affect both oil companies and the markets for clean transportation technologies like alternative fuel vehicles (AFVs).

Because of U.S. and some state government policies that mandate automakers produce more fuel-efficient vehicles and/or AFVs, low oil prices mean that it’s more expensive for automakers to improve fuel efficiency and produce AFVs to make these vehicles competitive with less fuel-efficient, and less costly, conventional vehicles. If they don’t absorb these costs, they’ll likely wind up paying penalties for being out of compliance with fuel efficiency standards and AFV mandates.

Raise the Tax

Federal and state government subsidies and incentives for AFVs provide some insulation from these costs. Yet, these policies were designed in an environment where oil prices were 30%–50% higher than they currently are. More recently, two policies have been proposed that would be beneficial to automakers seeking to comply with stringent fuel efficiency standards and AFV mandates. The first is an increase in the gas tax; the second, an increase to the U.S. federal incentive for plug-in electric vehicles (PEVs) and the inclusion of natural gas-powered vehicles in that incentive.

The federal gas tax is currently 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel. The tax, which has not been increased since 1993, is used to fund the repair and update of U.S. roads through the federal Highway Trust Fund. In recent years, the fund has been on the brink of insolvency but kept afloat by stopgap measures that provide money from the U.S. general fund. The current proposal, which would increase the tax by 5 cents per gallon over the next 3 years, would provide $210 billion over the next 10 years. The following chart shows the effect the proposal would have on the average U.S. price of gasoline over the next 10 years if oil prices rise to $90/barrel by 2025.

Gas Prices Under Increased Tax Proposal, United States: 2002-2025

(Sources: Navigant Research, U.S. Energy Information Administration)

Getting Flexible

The federal incentive for PEVs currently maxes out at $7,500 per vehicle and is accessed by the PEV owner when they file taxes for the year they bought their PEV. Of note, a PEV owner has to accrue at least $7,500 of taxable income to receive the max incentive. The White House has proposed to increase the incentive to $10,000 per vehicle, provide it as a point-of-sale rebate, and include natural gas-powered vehicles as eligible. The point-of-sale rebate would enable AFV buyers to incorporate the incentive into monthly payments upon purchase and receive the full incentive irrespective of their income.

The effect of both policies would make AFVs more competitive with conventional vehicles on an energy cost basis and open AFVs up to a larger, lower-income market, making it much easier for automakers to comply with federal and state fuel efficiency programs. This is not the first time these policies have been proposed, and it’s likely they’ll meet similar fates as their predecessors. However, low oil prices do introduce a new dynamic that may provide some flexibility in Congress, as well as increased pressure from interest groups that may create the necessary support.

 

Finding a Pathway to Profit for EV Charging

— February 24, 2015

The question of whether it’s possible to make a profit from a public charging station continues to hang over the electric vehicle (EV) charging industry. The challenges are threefold:

  • The costs of the EV charger and installation, which remain fairly high.
  • The utilization rate; i.e., how many plug-in electric vehicles (PEVs) are actually using the chargers each day.
  • The question of what PEV drivers are willing to pay for the charging.

Level 2 charging is still the most widespread type of installation deployed in public charging, and a back-of-the-envelope payback model shows that it is possible to receive a reasonable return on investment (ROI) for a Level 2 charger with high utilization and the right price point. A networked Level 2 charger with two plugs typically costs around $5,000–$6,500. Installation costs vary significantly, but can easily double the upfront investment by the site host. Operating costs are actually quite low. The electricity used is not a major cost factor, even at a relatively high cost of $0.13 per kWh (as in California, for instance). Typically, the site host will pay monthly services fees to a network operator. In some cases, it will share revenue with the operator, as well.

Just in Case

It’s important to note that there are only so many hours in the day that a public charger is going to be both accessible and likely to be used. If a dual public charger can reach utilization of around 10 charging sessions per day, and charge $2 per session, the host could make back the initial investment in 5 to 6 years.

This picture is a little rosier than the reality today, simply because the current rate of usage of public chargers is nowhere near 10 charging sessions daily. Nevertheless, this simple ROI model demonstrates that there is a pathway to profit for offering public charging services. However, there is a real question as to how many drivers will be willing to pay $2 for around 20 miles of charge, which is what a typical battery electric vehicle (BEV) driver may get from a single charging session. Given that this should cost them less than a dollar when they charge at home, it’s not clear that Level 2 public charging will ever be much more than a just-in-case opportunity for drivers. This will be even more accurate as we see affordable, longer range BEVs come on the market, since the need to top up during the day will be lessened.

Keeping It Free

These economics are one reason why many businesses will continue to offer public charging as a free service, figuring that there’s more benefit from using the chargers to attract customers, and keep them shopping longer, than to collect charging fees. It’s also why public charging manufacturers are offering leasing or no money down, no interest financing to keep the upfront cost from being so daunting.

According to Navigant Research’s new report, Electric Vehicle Charging Services, global revenue from EV charging services is expected to grow from $81.1 million annually in 2014 to $2.9 billion by 2023.

Annual Revenue from EVSE Charging Services by Region, World Markets: 2014-2023

 EV Charging Services chart

(Source: Navigant Research)

EV charging is a promising new, multibillion-dollar business sector. These forecasts include revenue from DC charging, which is likely to be a more lucrative segment than Level 2. But our scenario also assumes that some public charging will remain as a free perk, rather than as a direct revenue generator, given the questions that linger about drivers’ willingness to pay for top-up Level 2 charging.

 

Differing Diesel Views Sow Auto Industry Confusion

— February 17, 2015

During January’s North American International Auto Show (NAIAS), several manufacturers announced new diesel models to help them meet increasingly stringent fuel economy standards. Nissan unveiled a second-generation Titan XD that straddles the line between light and heavy duty pickups. Nissan will initially build the Titan XD, scheduled to launch this fall, with only a diesel engine; gas trucks with V6 and V8 engines will come later.

GM will be introducing a diesel engine in its Chevy Colorado and GMC Canyon later this year that could potentially increase fuel economy from the current 27 mpg to 30 mpg. Fiat Chrysler announced it will be increasing production of the Dodge Ram 1500 EcoDiesel pickup from 10% of models to 20%.

In the world of diesel cars, Volkswagen will unveil the Golf Gran Turismo Diesel (GTD) car at the upcoming Geneva Motor Show in March. Later this year, Suzuki will add an automatic transmission and several other updates to its SX4 S-Cross.

A Particular Problem

Diesel cars and trucks usually attain higher fuel economy ratings than their gasoline counterparts. According to Navigant Research’s report, Automotive Fuel Efficiency Technologies, the share of diesel cars and light trucks in North America is expected to increase from 1% in 2015 to 2.8% in 2025 as automakers continue to introduce more fuel-efficient models.

However, across the Atlantic, cities are looking to decrease the number of diesel vehicles driving in urban areas due to concerns that diesel vehicles’ higher levels of particulate emissions are causing environmental and health problems.

Not in My Town

Paris Mayor Anne Hidalgo has designs on eliminating diesel vehicles from her city by 2020. Mayor Hidalgo recently announced a ban on some diesel delivery trucks and buses, beginning by July 2015. According to Paris24.com, Hidalgo will provide significant financial incentives for investing in less polluting vehicles. London Mayor Boris Johnson has similar concerns around particulate emissions and is doubling the congestion charges for driving diesel vehicles in the city center to £20.

One solution to reduce the amount of diesel emissions is to add a hybrid drivetrain to a diesel vehicle. Hybrid vehicles reduce the use of the diesel engine by relying on battery power during low speeds and when idling, thus reducing particulate emissions. According to Navigant Research’s report, Electric Drive Trucks and Buses, the currently small market for medium and heavy duty diesel hybrid trucks will grow by a 2014–2023 compound annual growth rate (CAGR) of 28.5% to nearly 95,000 units worldwide by 2023.

 

2018: When EVs Will Change Everything

— February 11, 2015

Disruptive technologies don’t appear overnight. They come in gradual iterations until refinements and related technologies evolve to a point when they become so overwhelmingly useful that they are viewed as a necessary replacement for what came before.

While plug-in electric vehicles (PEVs) have come a long way since their introduction in the 1990s, they are not viewed by the general public as must-haves today, due to their higher prices and driving range limitations.  However, the next generation of PEVs, due to arrive in 3 years, will likely have a combination of features and prices that will convince most car buyers that driving a car with an internal combustion engine is a habit worth breaking.

Compare the development of PEVs to that of the smartphone. GM’s EV1 was the first significant PEV available in the 1990s, and its limitations in driving range and overall comfort prevented it and other PEVs of that era from catching on with consumers.

The evolution of smartphones can also be traced back to the early 1990s, when handheld personal digital assistants included an operating system with personal productivity features, and the first mobile phones that enabled talking (almost) anywhere became available. While these innovations quickly became popular with geeks and aficionados, they didn’t exactly capture a mass market.

10 Years After

Flash forward to 2009, and along came the Nissan LEAF and Chevrolet Volt, which took advantage of advances in battery technology, electric drive, display screens, navigation, and faster wireless communications to provide a driving experience that in most respects is superior to your father’s gas car. Most people have at least heard of a PEV by now, though PEV sales in the United States in 2014 were still less than 1% of all new light duty vehicles.

It similarly took more than a decade for personal digital assistants and mobile phones to converge, and for the then rudimentary technologies to be enhanced with better display screens and wireless connectivity, and new applications including texting, navigation, data sharing, and voice commands. For smart phones, the Blackberry, Windows smart phones, and then the iPhone became must-have devices that initially came with a high premium, but within a few years other manufacturers prompted competition that put this combination of features within reach of most consumers.

Tipping Point

That hasn’t happened yet with PEVs. But by 2018 we’ll have the Tesla Model 3 and the Chevrolet Bolt, which will package new technologies and driving enhancements to further separate PEVs from the pack. Anticipation for the Model 3’s extended range and Model S-like performance has been building since it was first announced, in 2013. The Chevrolet Bolt concept, which was announced at the International Consumer Electronics Show (CES) in January 2015, promises similar or better range for a lower price.

GM has said that owners will be able to start the Bolt with a smartphone application, and that ride-sharing and self-parking features will be included with the vehicles. Some of these features may be available in conventional cars by that time, but with the Bolt (and likely other PEVs), you’ll get them all under one roof for around $30,000, along with  superior electric drive performance and the savings and convenience of driving on electricity.

As with Apple and Samsung in the mobile device sector, Tesla and GM aspire to be the agents of change, and for now we can only guess at the electric alternatives that Nissan, Ford, Volkswagen/Audi, BMW, and Daimler will have at dealerships in 2018. Like smartphones, PEVs have certainly had their shares of missteps in their march toward ubiquity, but as Albert Einstein said, “Failure is success in progress.”

 

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