Utilities' Role in Transport Electrification: Capturing Benefits for All Ratepayers

Deck: 

Utility load growth from EVs can actually benefit all ratepayers by providing societal benefits and reducing utilities’ average cost of service.

Fortnightly Magazine - April 2016

Mass adoption of electric vehicles (EVs)1 is increasingly recognized as a viable and necessary step to meeting climate and air quality goals. As we see more and more EVs on the road, regulators and stakeholders are asking what role utilities should play in developing the charging infrastructure needed to reach mass adoption.

In the March issue of Public Utilities Fortnightly, the authors investigated three key questions: whether public investment in charging infrastructure is needed to meet EV adoption goals, how best to inject public funds into the market, and how to apportion costs and risks between the many industry players.

This follow-up article seeks to explore a related question: How can regulators ensure that utility investments in charging yield benefits to the general body of ratepayers?

We present evidence from our analysis showing that transportation electrification offers broad societal benefits, and that the resulting load growth can benefit all ratepayers by reducing electric utilities' average cost of service. We also examine approaches to encouraging flexible charging, ensuring ongoing charger maintenance, and expanding EV access beyond high-income customer segments.

Transportation electrification can benefit all ratepayers

The prospect of large ratepayer investments in a costly new technology that is currently owned by only a small number of affluent ratepayers is raising eyebrows. Some stakeholders are concerned that such investments could result in subsidies to EV owners from the general body of ratepayers. However, our analysis shows that utility load growth from EVs can actually benefit all ratepayers in two ways: by providing societal benefits, and by reducing utilities' average cost of service.

Figure 1 - Net Societal Benefits from EV Charging Load

The California Transportation Electrification Assessment (TEA)2 examined the statewide costs and benefits of different scenarios of EV adoption, from both the societal and the ratepayer perspectives.

Figure 1 shows the per-vehicle societal costs and benefits assuming 2.2 million light-duty plug-in electric vehicles sold in the state by 2030. Values are in 2014 dollars, and represent the net present value of each cost and benefit over the total lifetime of the vehicle cohort.

Net societal benefits occur, in large part, because electric vehicles require less primary energy than their gasoline counterparts. In short, EVs are more energy efficient.

Assuming, as this analysis does, that the upfront costs of EVs decrease over time, the difference in fuel consumption translates into significant lifetime cost savings for EVs vehicles relative to conventional vehicles. Also, over time falling vehicle costs offset the declining federal purchase incentive.

Figure 2 - San Francisco Bay Area Feeder and Substation Utilization

Unlike conventional utility energy efficiency programs, the costs and benefits of transportation electrification are realized in different sectors of the economy. EV owners save on gas and spend more on electricity. Tailpipe emissions are eliminated while smokestack pollution rises.

Energy regulators and many stakeholders are especially interested in understanding the pocketbook impacts on electricity consumers. A key question is whether serving EV charging load will require costly investments to reinforce the distribution grid. Our analysis found that infrastructure upgrades driven by EV adoption were modest, even when we assumed geographic clustering of EVs.

Figure 2 illustrates the projected incremental impact of EV adoption on feeder and substation utilization in the San Francisco Bay Area for a scenario in which 2.2 million EVs are added to the California grid by 2030.

Few upgrades are needed until after 2020. Even with rapid adoption in California (seven million EVs in 2030), the present value of EV-driven upgrades projected through 2030 represents slightly less than one percent of the California utilities' 2012 revenue requirement for their residential distribution systems. Distribution upgrades were lower in scenarios in which EVs are served on time-of-use rates and more charging occurs during off peak periods.

Figure 3 - Net Ratepayer Benefits from EV Charging Load

Our analysis also shows significant net benefits when EV adoption is viewed from the perspective of all ratepayers. As shown in Figure 3, we found that utility bills for EV charging exceeded the utilities' cost to serve EV charging load. This means a net benefit to all ratepayers, not just EV drivers, in this case an average of $2,591 per vehicle in present value terms over the life of the 2.2 million EVs.

These benefits arise because off-peak charging of EVs increases the utilization of transmission and distribution assets, lowering the average cost of service for all customers. The net benefit is the amount that can be spent on programs to promote EV adoption without increasing rates.

Ratepayer indifference, however, may not be an appropriate criterion. Conventional energy efficiency investments are usually not required to show net ratepayer benefits, and programs aimed at promoting EV adoption should not necessarily be, either. Utility participation and program spending should instead be weighed against the goal of jump-starting an emerging technology market, to achieve the mass adoption needed to realize climate and health outcomes.

Tapping flexibility increases benefits

Ratepayer benefits can be maximized by encouraging EV drivers to charge at times that benefit the electric grid. EV charging for personal vehicles is inherently flexible, since cars are typically parked for many more hours at a time than they need to charge to meet daily driving requirements. This is especially true during evening hours, and for cars parked at workplaces or other long-dwell locations during the day.

Net societal benefits occur, in large part, because electric vehicles require less primary energy than their gasoline counterparts.

Charging during electric system peak periods drives grid investment. In the TEA analysis, when EV owners were assumed to be served on time-of-use rates, projected transmission and distribution upgrade costs were less than half the level found for tiered or flat rates. Well-timed charging of EVs may also help lower the cost of integrating renewable resources, especially in regions with high solar potential.

Such "smart charging" of EVs may be accomplished either with time-varying rates, or through direct load control (in which the owner cedes control of charging to the utility or another entity). The potential impact of these approaches is currently being tested.

For example, PG&E has joined with BMW to enlist one hundred BMW i3 EV owners into a demand response pilot program. SDG&E's EV infrastructure program is framed as a pilot to test the effectiveness of dynamic rates in inducing customers to avoid charging their EVs when the local distribution grid is congested or high renewable output stresses the grid. As battery technology and charging preferences are continuously evolving, regulators should support further pilots.

Third parties' business models may not be consistent with minimizing grid costs. To better align incentives, the CPUC ruled that charging companies are commercial customers of the IOUs that must be served on TOU rates with demand charges.3

Utility load growth from EVs can actually benefit all ratepayers by providing societal benefits and reducing utilities’ average cost of service.

Whether third parties choose to pass TOU price signals and demand charges on to customers, either directly through charging rates or indirectly through subscription costs, is a business decision no different than a retailer's choice of whether to dim lights or adjust thermostat settings during on-peak periods. A charging network operator, for example, may choose to charge a flat fee for charging, no matter the time of day. Similarly, a mall operator that hosts a charging station may elect to offer free charging to attract shoppers, even though it will increase its demand charges.

Nonetheless, as the CPUC's decision states, "[t]he rate that an electric vehicle charging provider pays to the utility will be a cost of doing business ... The charging provider will have a strong incentive to operate its business in a manner that is compatible with the needs of the electric grid." 4

If regulators decide to allow utilities to invest in charging infrastructure, one option available is to condition ratepayer funding on adherence to utility rate structures or participation in demand management. Third party charging providers could then weigh the benefits of utility support against the cost of constraints on their revenue model.

Ensuring continued maintenance

An EV charging infrastructure network only provides value and reduces range anxiety to the degree it is well maintained. Horror stories of broken chargers spread quickly, causing distrust in the network and reducing the viability of EV ownership. Regulators therefore need to ensure that incentives are aligned to guarantee station upkeep.

One educative case study is the London experience - see the box nearby. This case reveals the problems that can arise when incentives are split between the charger owner and the party responsible for maintenance.

On the opposite end of the reliability spectrum sits Tesla, who owns its own network, faces no split incentives, and relies heavily on its proprietary network to sell its cars. Tesla is known for fixing issues quickly.

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EVSPs, who have so far largely been responsible for U.S. charger maintenance, sit somewhere in between. Economics says that competitive market forces and third-party information providers like PlugShare should motivate EVSPs to provide reliability.

In theory, EV owners should be punishing charging companies with poor maintenance records by switching to a competing charger. The PlugShare EV charger map, however, reveals that some of the most utilized public chargers have low user ratings and poor maintenance histories.

This may be because there is currently too little competition in charging. In most parts of the country, EV drivers are lucky if they have any existing charging options on their regular route, or at their workplace. Drivers faced with maintenance issues may therefore be more likely to give up on charging outside their home, or to decide against buying an EV, than they are to find a viable competitor.

Utility regulators looking to avoid this problem should ensure maintenance roles are clearly defined, and take care to fairly balance the costs of maintenance with the financial benefits from charging. First and foremost, it is essential to make sure site hosts have some financial 'skin in the game' so that they are invested in following through on maintenance.

This was lacking, for example, at some sites installed during the EV project. Hosts paid nothing to have a charger installed, and so some had no interest in keeping up chargers when things went wrong.

Beyond that, the best way forward depends on the charger ownership model. If a utility owns chargers, the split incentive issue is avoided. Unlike Tesla, though, utilities under the cost of service model grow their earnings by investing in infrastructure, and are not always incentivized to ensure new equipment is maintained and utilized. In the case where utilities own charging, regulators should therefore condition cost recovery on ongoing maintenance and customer service metrics.

Regulators looking to instead take advantage of partnerships between utilities, automakers and/or EVSPs (see our piece in last month's issue) should be careful to protect ratepayer investments with thoughtful maintenance contracts that match clear responsibility with clear financial incentives. If they are well structured, such partnerships can avoid London's curse, and provide a charging network that drivers can rely on.

Broadening EV access

California's goal to expand EV ownership beyond relatively affluent early adopters gives rise to a potential rationale for utility participation in the EV charging market.5 The current high cost of EVs relative to average income and small number of used EVs for sale pose significant barriers.

The California Air Resources Board is implementing a range of pilot programs aimed at reducing these obstacles. Such programs include funding for EV car-sharing fleets, extra incentives to buy EVs within existing "cash for clunkers" trade-in programs, zero-emission truck and bus projects, and additional rebates for the purchase of public vehicle fleets serving disadvantaged communities.

The lack of disposable earnings and liquidity associated with disadvantaged neighborhoods heightens uncertainty about consumer adoption in these areas, making them less attractive to EVSPs. These realities mean that disadvantaged communities are unlikely to see EV charging infrastructure development without additional public support.

California's focus on ensuring access to EV charging infrastructure for all communities is essentially a universal service goal. Historically, regulators have employed a variety of approaches to realize universal service for network goods.

Cross-subsidies (in the case of telecommunications) and postage stamp rates (in the case of electricity provision) were used to socialize the expense of serving customers in high-cost areas, while lifeline rates provided affordable access to low-income customers. This continues to be the model for electricity distribution service in the US, and could be extended to the deployment of EV charging infrastructure throughout utilities' service territories.

Utility participation in EV charging does allow regulators to condition approval of ratepayer funds on minimum levels of investment and station maintenance in disadvantaged neighborhoods. This has been a focus of all three California IOU application processes.

One option for regulators to maintain competition in the EV charging market while serving disadvantaged communities is to require utilities to be the 'provider of last resort,' the entity required to provide charging infrastructure in areas where the private sector will not. This has been the approach, for example, of the New York Public Service Commission in its call for new business model demonstrations involving distributed energy resources.

This model could be adapted to the build out of EV charging infrastructure. Regulatory staff could designate unserved and underserved zones based upon the availability of charging equipment or socio-economic criteria (e.g., income, percentage of households and multi-family dwellings)6 and specify a minimum number of needed chargers.

Prospective suppliers could then submit bids for the level of matching funds needed to serve the area. If no bids were received, or the requested subsidy exceeded a specified threshold, the incumbent utility would be designated as the provider of last resort and authorized to recover the cost of installing infrastructure through rates.

Universal service policies developed for the telecommunications industry since the AT&T breakup may provide the most transferable historical example of this kind of approach, as they were designed for markets with utility and non-utility players. Particularly noteworthy are policies aimed at bridging the "Digital Divide" by extending broadband internet access to unserved and underserved low-income and rural areas.

Still, as the CPUC's Office of Ratepayer Advocates has noted, until there is sufficient progress on the many impediments to purchasing EVs facing those in disadvantaged communities, locating ratepayer-funded EV charging stations in disadvantaged communities may increase the risk of stranded assets and low utilization rates.7 To minimize these risks, utility regulators should be careful to match the timing and level of investment in charging infrastructure for disadvantaged communities with parallel programs that make it possible for residents to afford the cars themselves.

Conclusions

Our analysis revealed that, unlike utility energy efficiency and solar PV programs, utility EV programs can put downward pressure on customer rates. In the case of California, there are significant societal and ratepayer benefits to EV load growth. Regulators can increase ratepayer benefits by incentivizing charging at off-peak times, and by keeping charging costs down.

It is not yet clear which approach to these issues will be most effective. The CPUC has considered EVSP pricing a business decision, and economic theory suggests that if EV charging is competitive, EVSPs should be incentivized to keep charging rates reasonably low, and to pass on some form of time-of-use rates to drivers.

However, thanks to lack of competition in some areas, the risk of stranded assets, and a slight mismatch between profit motives and EV adoption goals, these incentives may not be sufficient to protect ratepayer investments in utility-owned charging in all jurisdictions. The right approach to pricing questions likely varies by utility charging role and market, and the California IOU pilots will provide useful case studies.

Ensuring maintenance is similarly complex. To prevent London's poor maintenance experience, regulators need to avoid split incentive issues through careful contracting and structuring of maintenance incentives, or by combining full utility ownership with maintenance requirements. Ensuring host sites have financial skin in the game will also help keep stations functioning.

Finally, utilities can play a useful role in expanding EV access. Tried and true universal service program designs can help, as long as they are coordinated with financial subsidies for vehicles. It is possible for utility EV programs to benefit all ratepayers. When it comes to capturing those benefits, the devil, as they say, is in the details.
 

Incentivizing Maintenance: The London Experience

A consortium of public and private organizations have partnered to fund and install the Source Network of more than 1,400 EV charge points across London. The network was launched in 2011 by London's Mayor Boris Johnson with an initial 150 charging points, and drivers have enjoyed free charging after paying an annual subscription fee (originally £100, more recently £5).

In September 2014, private firm BluePoint London (BPL) won a bid to take over day-to-day management of the network from the Mayor's transport office and earn the profits from driver subscriptions. BPL agreed to spend £500 per station per year for maintenance. However, ownership and ongoing maintenance of the stations was split between London's Boroughs, equipment manufacturers, and private businesses that hosted chargers.

Annual maintenance costs have turned out to be more than £500, and with little incentive to pay the excess, charger owners have left the network to fall into disrepair. More than thirty percent of stations were recently recorded as being unserviceable at any one time, and that number has been closer to seventy percent in some areas.

To realign incentives, BPL has begun making agreements with Boroughs to take ownership and maintenance of the stations in return for parking fees and profit-sharing payments. Still, confidence in the network has remained low, and EV drivers have been left frustrated.


Endnotes:

1. In this article, EVs refers to light-duty plug-in electric vehicles (both pure battery electric vehicles and plug-in hybrid electric vehicles). Zero-emission vehicles include both light-duty plug-in electric vehicles and light-duty fuel cell vehicles. 

2. E3 and ICF, 2014, "California Transportation Electrification Assessment." Phases 2 and 3, available at http://www.caletc.com/wp-content/uploads/2014/10/CalETC_TEA_Phase_2_Fina... and
http://www.caletc.com/wp-content/uploads/2016/01/California-
Transportation-Electrification-Assessment-Phase-3-Part-A.pdf

3. See CPUC Rulemaking 09-08-009, August 8, 2010, http://docs.cpuc.ca.gov/WORD_PDF/FINAL_DECISION/121450.pdf.

4. Ibid., p. 28.

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5. A 2014 survey revealed that 50 percent of Californian EV drivers earned above $150,000 annually. See Center for Sustainable Energy, "February
2014 Survey Report," available at https://energycenter.org/sites/default/files/docs/nav/transportation/cvr....

6. This designation could use, for example, the California Environmental
Protection Agency's CalEnviroScreen tool, which was developed pursuant to SB 535 (Stats. 2012, Ch. 830.). This tool ranks communities according to their environmental burden and socioeconomic record, and is used to allocate greenhouse gas allowance auction funds to programs targeting disadvantaged communities. See http://www.calepa.ca.gov/EnvJustice/GHGinvest/Documents/SB535DesCom.pdf and http://oehha.ca.gov/ej/ces2.html.

7. CPUC ORA, April 13, 2015, "Rebuttal Testimony on San Diego Gas and Electric Company's Vehicle Grid Integration Pilot Program," A.14-04-014, April 13, 2015, p. 26.


Lead image © Can Stock Photo Inc. / Nanisimova