Will Electric Cars Transform the U.S. Vehicle Market?

An Analysis of the Key Determinants

Summary

For the past forty years, United States Presidents have repeatedly called for a reduction in the country's dependence on fossil fuels in general and foreign oil specifically. Stronger efficiency standards and higher taxes on motor fuels are a step in this direction, but achieving even greater reductions in oil consumption will require changing the way Americans power their transportation system. Some officials advocate the electrification of the passenger vehicle fleet as a path to meeting this goal. The Obama administration has, for example, embraced a goal of having one million electric-powered vehicles on U.S. roads by 2015, while others proposed a medium-term goal where electric vehicles would consist of 20% of the passenger vehicle fleet by 2030—approximately 30 million electric vehicles.

The technology itself is not in question—many of the global automobile companies are planning to sell plug-in hybrid electric vehicles (PHEVs) and/or battery electric vehicles (BEVs) by 2012. The key question is, will Americans buy them?

The answer depends on four additional questions: 1. Is the cost of purchasing and operating an electric vehicle more or less expensive than the cost of a comparable conventional gasoline-powered vehicle? 2. Are the comparative costs likely to change over the next twenty years? 3. Do electric vehicles provide the same attributes as conventional cars, and if not, do the differences matter? 4. Will electric car owners be able to access the electricity needed to power their vehicles?

This paper attempts to answer these four questions.

There are two basic categories of electric vehicles—electric vehicles (BEVs), which run solely on the electric energy stored in the battery, and plug-in hybrid electric vehicles (PHEVs), which operate on both a rechargeable battery and a gasoline-powered engine. With both types of vehicles, the major incremental expense compared to a conventional vehicle is the cost of the battery. While the industry is working hard to reduce these costs, a battery in a BEV with an average range of 60-80 miles costs between $10,000 and $15,000. Hence, this paper compares the net present lifetime cost of electric vehicles with that of conventional cars, both at today’s costs and at projected future costs. The paper also runs comparison scenarios with different assumptions about gasoline and electricity costs, battery costs, consumer discount rates, and vehicle efficiency levels.

Costs

This paper finds that, at 2010 purchase and operating costs, a PHEV-40 is $5,377 more expensive than an internal combustion engine or ICE, while a BEV is $4,819 more expensive. In other words, the gasoline costs savings of electric cars over the cars’ lifetimes will not offset their higher purchase prices.

In the future, this cost balance may change. If one assumes that over the next 10 to 20 years battery costs will decrease while gasoline prices increase, BEVs will be significantly less expensive than conventional cars ($1,155 to $7,181 cheaper). Even when the authors use very high consumer discount rates, BEVs will be less expensive, than conventional vehicles although the cost difference decreases. PHEVs, however, will be more expensive than BEVs in almost all comparison scenarios, and only less expensive than conventional cars in a world with very low battery costs and high gasoline prices. BEVs are simpler to build and do not use liquid fuel, while PHEVs have more complicated drive trains and still have gasoline-powered engines.

Will Consumers Purchase Electric Vehicles?

Consumers purchase cars based on how they value multiple attributes. They care about performance, aesthetics, reliability, and many other features. Cost is an important consideration, but not the only one. Electric vehicle manufacturers have worked hard to ensure that electric cars are comparable over a wide range of attributes, but BEVs are plagued by limited range (the number of miles they can be driven before they need to be recharged), and consumers remain worried about the reliability of both BEVs and PHEVs relative to conventional vehicles. The latter problem will gradually disappear as motorists become more accustomed to electric cars, but range anxiety is likely to remain until battery technology improves. One can argue that such anxiety is irrational, since urban drivers, on average, drive less than 20 miles per day, but no one has ever asserted that consumers base their car purchases solely on rational calculations. One might contend that the value of greater range is (approximately) the $4,000 price premium consumers will pay for a PHEV over a BEV, according to our model. Regardless, the bottom line is that the range issue will significantly affect consumer choice and is a major barrier to the penetration of electric vehicles.

Is the Electrical Infrastructure Available?

To power an electric vehicle, consumers must have the ability to connect their vehicle to a source of electricity, the utility must have the capacity to transmit and distribute this additional power and sufficient electricity generation capacity must exist. If the private sector is unwilling to meet these three conditions (i.e. providing 1. charging equipment, 2. distribution capacity, and 3. electricity generation), then governments must intervene. However, this paper finds no clear market failure that would require or justify such interventions.

The charging equipment is not expensive, and it would not be difficult for households and commercial enterprises to install such equipment. The adequacy of the distribution and generation systems will differ from one state to the next, and the electric utility industry will have the ability and time to make the necessary investments to keep up with the increasing demand from electric vehicles. Private industry may not be willing to invest well ahead of demand, but it is not clear that building swaths of underused public charging stations is the optimal way to subsidize and accelerate the purchase of electric vehicles.

Can the United States Meet its Electric Vehicle Goals?

Significant penetration of electric vehicles can only occur if American consumers decide to forego purchasing gasoline-powered cars and opt to buy electric vehicles. For this to happen on a large-enough scale to make a difference in oil consumption or pollution emissions, electric cars must be competitive with conventional cars across a wide range of attributes, including total costs (purchase, operations, and maintenance) and range. For this scenario to occur, gasoline prices will have to increase to $4.50-$5.50 per gallon, and battery technology will have to improve significantly, providing increased range at decreased cost. Both scenarios are possible. Government assistance in the form of continued support for research and demonstration of new battery technologies and a willingness by Congress to place a cost on oil imports and conventional and unconventional air pollutants would accelerate this process.