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Electric Vehicles: The Case for (and Against) Incentives

Fortnightly Magazine - April 15 1996

sales will be negligible. The utilities argue that they could finance their EV programs through the improvement in system efficiencies made possible when EVs lead to flatter loads and have enough "room to spare" to reduce the average electric rate. The utilities assume that there will be essentially no flow of EVs into southern California without such a program (em a way to "prime the pump" (or "jump start" the EV industry). Once EVs are produced in significant number, the utilities can phase out their incentives; their program costs would go to zero. But program benefits in the form of increased electricity sales to EV owners would continue for the indefinite future. Under the "pump priming" metaphor, utility incentives to promote EV sales lead to rate benefits, not rate penalties.

Indeed, whether incentive programs penalize or reward ratepayers may be a matter of choosing the appropriate metaphor. The California utilities view their incentives as crucial to "prime the pump." My 1994 Energy Policy article posits that EVs will be sufficiently attractive to gain a small market share without utility price incentives. With utility price incentives, EVs will become more attractive, and their market share should increase. For example, a utility price incentive might boost EV market share (after 2000) from 4 to 6 percent of new car sales. Utility incentives would "turn the spigot" to increase the flow of EVs into southern California.

The market for alternative-fueled vehicles is so new that forecasting future vehicle sales is extremely uncertain. But of the two metaphors I find the "spigot" more descriptive, based on the earliest evidence gathered from stated-preference surveys. So I would argue that utility managers and regulators should expect to impose higher rates to recover program costs for EV incentives.

Regulators might justify such penalties to achieve public benefits from EVs. Penalties might be viewed as a tax on southern Californians who would benefit from cleaner air; the utility would serve as tax collector. But, is an electricity tax the best way to raise money for an EV incentive program?

A California state law, introduced as A.B. 3239 and enacted in September 1994, now prohibits this approach. Essentially, the law forbids utility rate increases designed to fund EV incentive programs unless the utility can show direct benefits specific to ratepayers in the form of safer or more reliable utility service (see bibliography, Cross 1995). Other states might resist this approach as well. After all, this tax raises the price of an energy form that is clean at the point of use. Would it not make more sense to impose the tax on gasoline or gasoline-powered vehicles, the major contributors to the smog in southern California?

Feebates — Carrot and Stick

In my opinion, the idea of "feebates" offers a better way to promote market penetration for cleaner vehicles. Under a feebate plan, California could impose a purchase-price fee on dirty vehicles and use the revenues to fund a rebate for EVs and other cleaner vehicles. The size of the fees (stick) and rebates (carrot) could be set with several goals in