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Electric Vehicles: The Case for (and Against) Incentives

Fortnightly Magazine - April 15 1996

likely impacts of distribution costs into perspective. For example, one might expect extra distribution spending to amount to around $400 per vehicle on the utility side of the meter. Adding this level of spending to our rate scenarios would end up erasing about one-quarter of the estimated rate benefits we identified.

The Impact of Utility Incentives

The potential rate benefits noted above raise an important policy question: Should the utility contribute financial incentives to promote the sale of EVs?

Incentives have come under intensive study in the state of California, both at the CPUC and in the legislature. One important question asks whether a utility should offer significant incentives in an attempt to reduce the purchase price of an EV. The utility might then finance the incentive program from the 1.5- to 3-percent rate reductions expected from the scenario analysis. If this were possible, utilities could promote EV sales without harming their competitive position.

The rate impacts of utility incentives become less certain when one considers our limited knowledge of the market for cleaner vehicles and the complex impacts of EV loads on utility operations and ratemaking. Computer simulation modeling can be used to help sort out these complex interactions. In a 1994 article in Energy Policy (see bibliography), I explained the structure and assumptions of a computer model developed to simulate the impact of utility incentives to reduce the sale price of EVs. The model simulates the impacts of EVs on the utility system as well as the impact of utility incentives on EV sales. It tracks of EVs and conventional gasoline vehicles as well as other, cleaner-burning vehicles that will likely compete in the southern California market. Market shares reflect vehicle attributes and customer attitudes. (Customer attitudes toward price, range, and other attributes of the vehicles reflect statistical interpretation of a recent, stated-preference survey.) The model helped us calculate whether SCE could contribute a significant share of EV purchase-price incentives and then finance the program without having to raise the average electric rate.

We examined several different versions of purchase-price incentives. We considered variations in the size, timing, and duration of the incentive, and also varied the financing assumptions: 1) recover costs immediately, or 2) recover the costs over the operating life of the EVs. The results of the many simulations were surprisingly similar. All simulations indicated that utility incentives could boost EV sales somewhat, and that utilities would benefit from somewhat more efficient operation of their generating capacity.

Nevertheless, the simulations all suggested that SCE would end up having to raise the average electric rate to recover its program costs, whether the incentives were large or small, permanent or temporary, expensed or capitalized.

An Alternative View

For their part, utilities in California have argued that EV programs will not necessarily lead to higher rates. The utility analysis of rate impacts typically compares two scenarios. The first scenario calls for a combination of fleet purchases, information programs, vehicle testing, and battery incentives to promote sufficient EV sales to meet the ZEV goals. The second envisions a future in which EV