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Edison Under the Hood

Can utilities put EV batteries in the rate base?

April 2012

compressor or pool pump ever could. The more involvement utilities have in that complex system, the better we’ll be able to manage it.

Second, think about scale. The electric vehicle fleet might become huge in just 10 years or so. The International Energy Agency predicts that by about 2025, plug-in light-duty vehicles will match sales of petroleum-powered vehicles. Depending on the pace of battery development—and the forward price curve for petroleum—that prediction might be pessimistic or optimistic. Some recent events—including Chevrolet’s decision to idle the Volt manufacturing line in the face of disappointing sales—show that EVs have a long way to go before they can really compete. 1 But the long-term trend strongly suggests transportation will become a large new source of electric load—and therefore a gigantic, distributed DR resource that will support a reliable and efficient grid.

Third, compare the cost structures of electric- versus petroleum-driven transportation. Batteries are expensive, adding nearly a 50 percent capital-cost premium for EVs compared to equivalent gas-powered vehicles—not counting government subsidies, which can reduce the premium to around 30 percent. However, in terms of per-mile driving costs, petrol cars are roughly three times as expensive to operate as EVs, depending on the fuel economy of the gas-powered car. 2 That’s because internal combustion engines are inherently less energy efficient than electric engines are, and on a per-Btu basis petroleum is more expensive than most electric power fuels.

This fuel-cost disparity likely will widen as geopolitical tensions bring rising prices to the pump—not to mention federal income taxes collected to pay for the U.S. military mission to secure the global oil trade. 3 At the same time, the EV capital cost premium will shrink, by virtue of nanotechnology developments and manufacturing scale economics. However, battery capacity to eliminate most drivers’ range anxiety will remain pretty expensive for some time to come.

To put it in utility accounting terms, the EV battery business model involves high front-loaded capital costs with low, stable operating costs. Conversely, the internal-combustion business model features lower up-front costs, with higher, more volatile operating costs.

Which of those two business models more closely resembles a regulated utility model?

A Vision Renewed

The fact is, EV batteries effectively will be part of the electric infrastructure, no matter who owns them. The idea of utilities owning the batteries might seem novel, but it makes sense given the practical factors at play. 4 However, the important question isn’t necessarily who should actually own the batteries, but how they should be financed.

The typical new-car loan amortizes a vehicle’s purchase price over a few years—six at most. This short payback reflects the quickly depreciating value of the vehicle, as well as the cost of consumer credit. How fast EVs will depreciate remains unclear, since they’re new to the market. The batteries in early-generation vehicles might degrade sooner than a typical auto engine does, but retired EV batteries might have even longer subsequent lives as part of fixed storage systems. Several utilities and manufacturers are collaborating on this idea.

Direct involvement by utilities in the EV battery business