Setting Up The Right Platform For Electric Vehicles

Posted in Finance Articles, Total Reads: 959 , Published on 06 October 2012

Global markets are recovering from one of the worst recessions of this century. As business activity picks up, the global automotive industry is anticipating mature auto markets to recover quickly and emerging markets to continue to expand. According to Polk, a global automotive market intelligence firm, global new vehicle sales are estimated to reach 96 million in 2016 from 73 million in 2011. Finally, we are on the right track. If this is the common perception, there is a need to pause and think!

Need to replace fossil fuels

We all know about the close connect between the current transportation system and the use of fossil fuels. According to a World Economic Forum – Booz & Company study, world’s transportation system accounts for more than 60% of the daily oil consumption, with 96% of the energy supplies to transport sector coming from liquid fossil fuels. The existing framework of energy production and consumption is unsustainable – economically, environmentally and socially. Enormous oil consumption by our transportation system and concerns about energy security due to increase in oil demand are serious issues to be dealt with.

Countries across the globe are looking forward to tackle the menace by mandating improved fuel efficiency and supporting deployment of new transportation technologies. State governments all over the world, particularly China, Japan, the EU and the US have already raised mandates for minimum fuel efficiency from the current 10-15 kilometers per liter (kmpl) to between 21-28kmpl by 2020. Subsequently, automotive manufacturers now realize that the existing internal combustion engines (ICEs) will not be able to help them beyond a certain limit in meeting fuel-efficiency targets.

Further, with the automotive industry trying to hedge itself from the fluctuating oil prices, there is a significant emphasis on new technologies, especially on cars supported by electric batteries. Many of the well-known companies such as Daimler, Ford, Mitsubishi and Renault-Nissan, are trying hard to get the first-mover advantage in electric vehicle (EV) space. They are now interested in moving beyond prototypes of low-cost affordable electric cars towards developing vehicles suitable for mass consumption.They have not only launched a few models in the market, but have also developed a healthy pipeline for future launches. It would be fairly correct to say that the future is electric!

Is it the best way forward?

Characteristic features of EVs– zero tailpipe exhaust emissions, silent engine and nearly 2.5 times more efficiency than ICEs. All of this makes them a promising candidate among the new transportation technologies.  However, there is a flipside.Most of the global electricity generation takes place via fossil-fuels.The fossil fuel usage is likely to rise further to meet the swelling electricity demand caused by increasing EV penetration.Consequently, the basic purpose of EV adoption gets defeated with EVs being indirectly responsible for polluting the environment. So, until we begin producing majority of electricity through renewable sources, EVs do not seem to be a right fit.

Further, one of the most successful EVs in the market is Nissan LEAF. It offers close to 160 km of driving range per battery charge and comes at a hefty cost of nearly INR17,00,000 (US$32,780). For charging EV battery, low power – Level 1 – chargers are cheapest in market but they take 10-20 hours for a full charge. While, high power – Level 3– chargers can charge a battery in less than 30 minutes, they can cost more than 20 times the Level 1 chargers.

Therefore, from the consumers’ perspective, there are concerns regarding high EV price, low driving range and long charging times. Though customers appreciate the benefits of sustainability, most of them are unwilling to pay a premium for the inconvenience of nascent technology and underdeveloped charging infrastructure. According to a 2011 Deloitte Survey, more than 85% of the 13,000 survey respondents across 17 countries felt that range, convenience to charge, and cost to charge were all “extremely important” or “very important” considerations for them to buy or lease an EV.Despite significant improvements in battery technology and charger capabilities in recent years, as the Deloitte Survey finds, there is still a huge gap in the consumers’ expectations and the current technical capabilities of EVs.

What’s next?

Several estimates suggest that it will not be before 2020 when battery technology and infrastructure improves to a point that ‘range anxiety’ disappears, EVs become affordable and grab market shares at least in the low single digits. By this time one can also expect a good chunk of electricity production happening through non-conventional energy resources. So, is it fine to sit and relax till 2020? May be it is not prudent to expect things changing one fine day! It is a slow and steady process with possibilities of some unusual pathways.

With individual customers unlikely to be the driving factor for EV propagation in initial phase, one of the plausible solutions is the new market disruption.In such a scenario,EVs will not compete – because of the disadvantages discussed – with the existing ICE cars, but will create their own market. One such case is EV car-sharing/renting by fleet operators. In most of the cases people in cities drive less than 50 kilometers a day. Therefore, for short and infrequent trips of city-dwellers – who also care for the environment – EVs would make a natural choice. While customers do not have to buy costly EVs, they can also feel good for not contributing to the pollution levels.

Additional government incentives in form of tax-breaks, etc. would be icing on the cake. Considering that cars of car-sharing fleets spend more time on roads than the ones owned by individuals and they can use single charger to charge multiple cars, and thus, they are likely to reach break-even very soon. In extreme cases, when their cars are expected to run more than 150 kilometers a day, they can think of having Level 3 chargers. In the process, customers’ range anxiety would gradually diminish as they ride EVs more frequently and realize that their anxiety is more fiction than fact.

Additionally,with larger penetration of EVs, electricity demand is bound to increase. Consequently, governments would try to resolve energy issues by introducing smart grids – power grids capable of sending and receiving data. With dynamic pricing, power companies would optimize the grid performance and prevent power outages. Once the smart-grid technology matures and grids become capable of V2H (Vehicle to Home) and V2G (Vehicle to Grid) transmission, the large EV fleets of car-sharing services will have the potential of acting as energy reservoirs. During peak hours, when the price of electricity would increase, car-sharing services can sell the energy stored in their idle cars to the power grid and earn money.

Some of these things might look a bit futuristic, but with dual concerns of energy security due to increased oil demand and subsequent rise in greenhouse gas emissions, some of these solutions become inevitable. In the Indian context, we have always been good leap-froggers. When it was about telecommunications, we leapfrogged the era of pagers to directly adopt mobiles after landlines. In retail industry, in more recent years, India has been relatively successful in leapfrogging the specialty stores and moving towards mass propagation of e-commerce and m-commerce. On similar lines, it should not be wrong to assume that India could be one of the leaders in EV adoption. Reason – with rising disposable income, excessive dependence on import of oil, increasing awareness toward environment, EVs should be an excellent proposition for a country like India.

EVs had just started their journey in the early 1900s, when they were taken over by ICEs. However, the cycle seems to be over. Though consumer expectations outcast the current capabilities of EVs, growing consumer interest, government incentives and mandates, increasing environmental concerns, easy financing and new incentives like smart-grids make a strong case for EV adoption, stronger than ever before. However, these enablers will only be effective if the EV makers hit the Center of Gravity with improved range and charging efficiency in due course of time.

This article has been authored by Pulkit Bohra from IIM Ranchi.

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