Making Sense: The Case for Electric Vehicles

The line between power generation and the transportation industry is blurring as electric utilities recognize a vast potential market for their product. And the arrival of all-electric vehicles (EVs) has started a land grab. Electricity demand has been flat in recent years, but it’s pretty intriguing to imagine how that could turn around if cars, trucks, and buses switched from Exxon Mobil to Xcel Energy for all their go juice. 

As energy traders and portfolio managers, we tend to interpret grid-impacting developments such as renewable energy, microgrids, and energy storage in terms of our jobs and careers. However, electric vehicles are one of the key disruptive technologies that will eventually and dramatically change not only the electricity grid and our job roles relative to it but also essential elements of our daily lives, including:

1. The environment
2. Our lifestyle
3. Our pocketbooks

Environmental (and Grid) Impacts

According to the EPA, transportation contributes close to one-third of all U.S. greenhouse gas (GHG) emissions – roughly the same as power generation. Both industries aim to reduce pollution, with utilities migrating toward renewables and transportation shifting from gasoline to electric engines. Without question, EVs are more efficient, cost less to run, and require less maintenance, but they are accompanied by higher up-front costs and more limited refueling options than gasoline cars. Then there’s the associated specter of battery disposal and the protestations (typically from big oil) that fueling transportation will merely switch us from dirty gasoline to dirty coal, a move that helps utilities but not necessarily the environment. Further:

• In many regions of the U.S., coal makes up a large portion of total generation, especially in off-peak (overnight) periods when many units are left on, even when their energy isn’t immediately needed. As a result, coal is still a vital part of our energy infrastructure that can’t always be shut off overnight when demand is low. 

• The expected, logical overnight charging pattern from utility-scale batteries and EVs does lend steam to big oil’s argument. 

• Renewables can’t always be counted on generally, let alone follow a rapid early morning load increase, which means coal and natural gas won’t disappear soon. 

Technology Advancement is Driving Adoption and Savings

Even given these facts, the mass adoption of EVs can still help cut fossil fuels and enable a more intelligent and efficient power grid. As car batteries become increasingly capable of charging faster and storing more, they will avoid charging when the sun isn’t shining or the wind isn’t blowing. If an EV can top off in a couple of hours and drive a few hundred miles on a charge, everyday commuters may be able to skip charging at night when conditions warrant. 

For example, after commuting to work, they’ll plug in and fully charge by lunch, leaving their car in a voluntary state ready to provide peak shaving, frequency regulation, and other grid services, with the revenues from those services helping to offset charging costs. When this is done in large numbers, it may be the answer to things like CAISO’s famous Duck Curve problem, and indeed, California is leading the way in promoting EVs.

Coming Soon… Aggregation Services!

Utilities are already working on Vehicle-to-grid (V2G) integration to allow “aggregation service” providers to manage plug-in fleets that amount to capacities meaningful enough for ISO bidding (FERC Order 841 mandates 100 kW minimum capacity to participate). Cars and charging stations will need to be “smart” with time-of-use rates that promote charging at work when renewable sources are plentiful and feeding the grid from home to avert gas peaker starts in the early evening. At other times, EVs may get credited just for providing spinning reserve and regulation capacity.  Managed fleets of buses and service vehicles will add economies of scale and their own set of challenges (and incentives) to optimize EV P&L.

Lifestyle Impact

Soon, EVs will become as affordable and ubiquitous as conventional vehicles. Converting from a gas to an electric car now requires a behavioral or lifestyle shift because you can’t just pull over, fill up in 5 minutes, and be ready to drive another 300-400 miles. Every electricity-gobbling accessory on an EV, such as the AC, entertainment system, heated steering wheel, and leather seats, has a noticeable impact on range. Accommodating that will take some adjustment to your regular routine.

Additionally, to maximize benefits and minimize non-productive charging time, there are decisions to make that have associated trade-offs. Range planning is required, especially on road trips, and there are options for when/where to charge or make money providing grid services. Many drivers won’t want to be bothered by that unless the payoff is meaningful. 

Pocketbook Impact

Recently I had the pleasure to carpool with a new Tesla Model 3 owner.  As you can imagine, the conversation centered on this unique technological marvel and how intelligent a purchase it was.  The car is elegant, fast, and more like an electronic device than a traditional car. But is it economical?  I wanted to crunch some numbers to find out. By the way, I did this in late December (2018) as time was quickly running out on the $7,500 EV Federal Tax Credit. 

Analysis: Fuel Savings Alone Aren’t Enough

My 2013 Pathfinder is in good shape, still under warranty, and hauls too much to replace with a sedan, regardless of savings. Only Tesla’s Model X and the new Jaguar I-Pace (the latter costing more than  $80K) come close to Nissan in terms of utility. This is one of the hurdles EVs face in the SUV-loving USA, which generally doesn’t have the infrastructure (at least where I live in North Carolina) to make the switch convenient or environmentally compelling, which go hand in hand. Without many fast charging facilities around, no time-of-use rates, or the ability to provide grid services, I would usually need to charge overnight at home with power fed by coal-fired generators. And clearly, not everyone in my state welcomes EVs with open arms.

Even if you needed to buy a new sedan now, the economics for an all-electric still isn’t that impressive with our relatively low gas prices in the U.S. However, thanks to the incredible specs of the reasonably priced Model 3, we’re getting close. There are very few 5-seat plug-in EVs available now, like the Nissan LEAF, BMW I3, and Chevy Bolt, and none can match the range of elegant designs of the Tesla.

Assessment of Savings

I did some quick math with the following assumptions using the Tesla fuel savings calculator:

• Tesla’s Model 3 uses .25 kWh per mile
• A supercharger cost of $0.26 per kilowatt hour
• Gasoline cost assumes 28 MPG for Model 3 at $2.85 per gallon

Using these numbers, a person driving 12,000 miles per year would pay around $1,200 annually for gas compared to around $700 for an equivalent number of miles from a Model 3 – a savings of about $500 per year.

Using a lower home charging cost of $.11/kWh, the savings move up to around $900 per year, but up-front costs need to be factored in. Add an even hundred dollars for avoided oil changes, and you’re looking at about $1,000 per year savings. 

The savings increase as gas prices rise, but currently, we’re around $2.15 here in NC at the time of this writing, so the benefits are diminished. Also, when you consider the various hybrid vehicles that can attain as much as 50 MPG, the fuel dollar savings argument all but evaporates. For example, the new Honda Insight has a gasoline engine that can charge an electric drivetrain and sells new for around $25K. The cheapest Tesla will begin selling in 2019 for $35K, so the up-front cost cancels out any fuel savings even if you own it for 10 years. In Tesla’s favor, EV maintenance costs are expected to be lower since fewer moving parts and fluids are involved, so consequently, Tesla cars have superior resale value.

Conclusion

If gas prices stay under control, saving money alone isn’t a valid reason to buy that new Model 3 or similarly priced competing EV. There are many cheaper alternatives considering the total cost of ownership over 10 years, but it’s just a matter of time before EVs overcome the issues of size, range, and convenience. I predict that within 5-years, I will be able to replace my 2013 Pathfinder with an all-electric SUV. My decision will be based on features and “coolness” factors such as performance, connectivity, and automation. Cost, convenience, and the environmental impact of gas and EVs (at least in NC) are roughly equivalent now but will increasingly lean (sooner than later) more and more in favor of fully electric vehicles. 

We live in exciting times. As both an energy consumer and professional, it’s fascinating not only to witness but also to participate in the revolution and disruption gripping our industry.