Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

12 April 2012

How Electric Cars Can Beat their Gasoline and Natural-Gas Rivals

[For recent comment on Germany’s big bet on wind and solar energy, click here. For reasons why Carlos Ghosn may be a genius, click here.]

Electric cars have some decisive advantages compared to cars powered by gasoline and even natural gas. They have the lowest energy cost of driving. As my calculations show, natural gas at industrial rates, solar photovoltaic electricity, and nuclear electricity provide the lowest per-mile energy cost. The first two cost 1.8 cents per mile, the last 1.5 cents. In comparison, gasoline at $3.78 and 30 miles per gallon costs 12.6 cents.

The differences among these three lowest costs aren’t meaningful. Within the probable error of the calculations, which were based on information publicly available now, they are the same. But the advantage of all three over gasoline is real and huge.

Electric cars are much simpler and more elegant in design and operation than internal-combustion cars. Electric motors provide nearly constant torque throughout their entire range of RPM, which is much wider than for reciprocating piston engines. So electric drive trains don’t need transmissions. (Have you ever heard a subway train shift gears?)

Electric drive trains also don’t have to endure the high temperatures and pressures of engines powered by sequential internal explosions of fuel. So, apart from their battery packs, they should last much longer with much less maintenance than internal-combustion vehicles.

If energy cost per mile and maintenance were the only considerations, we would be seeing an explosion of sales of electric cars. They offer the same reduction in energy cost as industrial natural gas: nearly a factor of seven over the cost of gasoline. With gasoline north of $4.20 a gallon, that’s the equivalent of 60-cent-per-gallon gas!

In addition, electric cars don’t emit carbon monoxide, noxious fumes, or any pollution. And you can charge them at home, in your garage, from a standard electrical outlet, without installing a natural-gas compressor.

Judging from these advantages, you would think electric cars would be selling like iPads. But they aren’t. Besides consumers’ inertia, the reason is electric cars’ three disadvantages: (1) a higher initial price, (2) limited range and (3) driving on coal.

At present, electric cars cost more to buy than their gasoline counterparts, and their driving range on a single charge is more limited. Aware consumers who believe in science and live where coal dominates electric power also don’t want to drive on that dirtiest of fuels, which spews twice as much greenhouse emissions per unit of energy as either natural gas or gasoline.

The dividing line for carbon emissions is 50%. Where coal produces 50% or more of your electric power, you would only increase your carbon footprint by driving on electricity. (For example, where I live coal provides 87% of electric power, so I would increase my carbon footprint by 74%.)

This blog doesn’t just bewail problems. It provides solutions. There’s no easy or quick solution to the carbon problem except reducing the fraction of our electricity that comes from coal. Converting our electric plants to natural gas can help there, but that takes time. Drivers can also reduce their personal carbon footprints by setting up a home solar array, but that’s expensive. So electric-car makers ought to be pushing their wares hardest where coal accounts for significantly less than 50% of electric-power generation.

But once over the carbon hurdle, electric cars face still two more: high purchase prices and limited range. Fortunately, there is a common solution to both problems—one which would also help gas stations survive as more drivers begin charging electric cars and compressing natural gas in their homes.

The solution would require some changes in how car-makers and gas stations do business. But it doesn’t require any technological innovation, let alone breakthroughs. It’s easily doable, and it would propel this new industry forward like a rocket.

Electric-car makers could sell the cars to drivers but only lease the battery packs. That would lower the selling price of the car by a substantial amount, giving electric cars an initial-price advantage over both gasoline and natural-gas cars.

At the same time, battery-pack leasing would solve the range problem. “Gas” stations would own or lease the battery packs and maintain supplies of fully-charged ones, ready to install. Drivers would come to “gas” stations and put theirs car up on racks. The station’s attendants would pop a few screws, lower the discharged pack, and replace it with a fully charged one.

The driver would be back on the road in no more time than it now takes to gas up and buy a doughnut. Cars could go hundreds of miles per day on electricity, just as they now do on gasoline or natural gas, with the slight inconvenience of a few more “pit stops.”

A local “gas” station would provide the battery pack in the car when it is first sold. Agreements among the car maker, gas station and buyer would govern who owns it and the terms of its use. Insurance would protect the car maker and “gas” station against loss or theft of, or collision damage to, the battery pack. Separately owned gas stations would have master agreements for interchange of battery packs in long-distance driving.

The agreements need not be much more complex than those for buying cars on time, which also can involve several parties (car maker, financer, and driver). They would relieve drivers of all worries about the battery packs, including charging-cycle deterioration and collision damage (which has been reported, in crash testing, to cause fires). They would also allow car makers or their battery suppliers to improve battery packs continuously (and recycle the lithium in old ones), in ways completely invisible to drivers.

Of course leasing the batteries to gas stations would raise the per-mile cost of electric driving. Gas stations would have to charge more for a fully-charged battery pack than just the cost of electricity to charge it. Not only would they have to pay their operating expenses and make a profit; they would also have to recover the cost of replacing each battery pack when its ability to recharge falls below acceptable limits for driving. Their removing this worry and burden from drivers would come at a cost.

But that cost appears bearable. The Nissan Leaf’s website advertises a battery lifetime of ten years, with a possible deterioration of 30% or so in range. Since drivers would charge at least once a workday, and since there are 250 workdays in a five-day, fifty-week work year, that means about 2,500 charge cycles. The cost of replacing a $5,000 battery pack after those cycles would add an extra two dollars to the cost of each charge, or about 2.9 cents per mile (at the Leaf’s 73-mile EPA range [footnote 1 at bottom of page]).

That would raise the energy cost per mile from 1.8 cents for solar photovoltaic electricity or 1.5 cents for nuclear electricity to 4.6 cents and 4.4 cents per mile, respectively. Those figures compare with the per-mile energy cost of natural gas at residential rates, namely, 4.3 cents per mile. In fact, they are all within the range of probable error in my calculations and should be considered equivalent.

Natural-gas cars would still offer an energy-cost-per-mile advantage if gas stations could procure natural gas at industrial rates. According to my table, they could offer driving at 1.8 cents per mile, or about 2 cents after a 20% surcharge for operating expenses and profit.

But with leased battery packs, electric cars would have a substantial initial-price advantage over both gasoline and natural-gas cars. That price advantage would be even higher for natural-gas than for gasoline cars, by at least the minimum $3,500 extra that it costs to buy a new natural-gas car now.

So consumers would have a real price choice. They could save big money on the car price and go electric, at the cost of paying more per mile of driving (but still much less than for gasoline). Or they could buy a natural-gas car at a higher initial-purchase price and save more in driving over the life of the car. But in either case they would save fuel costs over gasoline, by at least a factor of three.

The model here is the computer-printer industry. Printer sales skyrocketed after the industry discovered the “Gillette” business model of selling razors cheap and blades dear. By increasing their prices for printer cartridges (with extra profits from heavier use), printer makers lowered their initial prices for printers, sparking sales. The electric-car industry could do the same thing with cars and battery packs, substantially reducing initial purchase pricing.

An electric car is a thing of simplicity, grace, elegance and beauty. It has no transmission, no reciprocating pistons, no crankshaft, no camshaft, no clickety-clacking valves, no exhaust manifold, afterburner or muffler. It needs no electric starter. It has only electric motors (that also serve as generators) and solid-state power controllers, which have no moving parts. Its battery pack is the only awkward thing in it, and the only real point of maintenance worry.

Solving the initial-cost and range problem for electric cars, by itself, would be no small thing. But the battery-pack-leasing solution would also have societal benefits. As electric and natural-gas cars come into greater vogue, the future of gas stations will be in jeopardy. For the first time ever in the automotive history, consumers will be able to “fill up” in their homes. They won’t ever have to go to a gas station except when they need repairs. So gas stations, with all their gainful unskilled and semi-skilled employment, might begin to disappear.

The price disadvantage of residential over industrial electricity (and natural gas) will keep lower-income consumers coming to gas stations, especially if they drive a lot. But many higher-income consumers, from whom driving takes a much lower share of income, will accept that price disadvantage for the convenience of “filling up” at home.

So battery-pack leasing to or by gas stations would be a boon to the whole electric-car industry, including its infrastructure. It would lower drivers’ car-purchase price, giving electric cars a significant initial-price advantage for the first time. It would allow electric cars to recharge about as quickly as gasoline cars now fill up. It would unleash electric cars’ range, at the small inconvenience of more frequent pit stops. It would assuage consumers’ anxiety that, because of improvements, next year’s model of the very same car might have a better, longer-lasting or cheaper battery pack. It would promote energy independence in transportation, since virtually none of our electricity comes from foreign oil. And in places where less than half of electricity comes from coal, it would give drivers the satisfaction of lowering (or just not increasing) their carbon footprint while driving a modern, elegant, easy-maintenance, nonpolluting machine.

P.S. Where Government Might Help. The solution to high electric-car prices and short ranges proposed above might make sense for a single car manufacturer. But there are already two entrants in the industry, Chevy and Nissan, and at several more expected this year. There soon will be many different types of battery packs.

If every car maker has its own proprietary battery pack, gas stations will have a tough time maintaining stocks of charged batteries for every make of car. Some standardization of packs— for physical interchangeability only—is vital if this scheme is to work.

Otherwise, electric cars’ battery packs will be like incompatible railroad gauges in the nineteenth century. Different sizes and types will create mini-monopolies, make everything more expensive, and hobble the industry’s development nationwide.

It’s possible that an industry consortium could sort this all out. But more likely, car makers will continue to compete in everything, producing a jumble of battery-pack designs that render a sensible industry infrastructure impossible. To avoid this problem, government can and should encourage or require standardization of battery packs.

Standardization should be for interchangeability only. No regulation should mess with battery packs’ proprietary innards. Gas stations could and should charge more for recharged battery packs that have greater power capacity or lighter weight.

All that's needed is standardizing things like overall voltages, maximum current capacity, sizes, shapes and plugs, so that service stations can install recharged packs interchangeably. The packs’ internal, functional designs can continue to be proprietary and chief points of competition. Even plugs can vary in design as long as they fit together.

Battery packs’ most vital commercial parameter—energy-storage capacity in kilowatt hours—should NOT be standardized. That’s precisely where we want robust competition. If a battery maker can fit more power storage into the same size and weight, more power to him!

But within these limitations, battery-pack interchangeability would have three desirable effects. First, it would create a new industry for electric-car battery packs, just as IBM created the software industry in 1969 by “unbundling” computer software from computer hardware (then so-called “mainframes”). Second, in so doing, it would encourage car companies to focus on their main expertise—cars—while leaving battery design and chemistry to experts in those fields. Finally, it would create robust competition in battery packs, quite apart from that in cars, leading to quicker innovation and improvement of the most critical component of electric cars.

To encourage rapid development of a sensible electric-car infrastructure, government should encourage or require such minimal standardization. At the very least, it should enact a limited antitrust exception permitting otherwise competing private firms to join together and standardize electric-car battery packs, for inter-brand interchangeability only. There could, of course, be different standards for different classes of cars and light trucks (but not too many, lest the battery-pack leasing scheme become too complex.)

Footnote 1: Nissan’s Leaf website is coy about the replacement price of battery packs, so this price is just a rough guess. Any estimate is likely to be rough for the same reasons that Nissan won’t tell. Battery-pack design and production technology are under continuous improvement. Sales haven’t yet reached anywhere near the level where mass production will achieve maximum economies of scale. The price of lithium is uncertain and will become more so as electric-car sales take off. And, for all these reasons, battery packs’ costs are industry trade secrets as closely guarded as their design. (These same reasons also argue for battery-pack leasing, which will keep these issues invisible to consumers, giving them the benefit of continuous improvement without the worry.)

Footnote 2: IBM unbundled and created the software industry only under threat of antitrust litigation by the federal government. As any one who follows the computer industry knows, unbundling software was one of most successful acts of “industrial policy” in human history. (Imagine if hardware makers like Intel, IBM and Apple still served as the only sources of software. Microsoft, Adobe and and Oracle wouldn’t even be in business!) Sometimes it takes a little government nudge to get private industry and investors to do the right thing.

Coda: Is Carlos Ghosn a Genius?

Although you don’t see the ideas in this post widely discussed in the popular press, it is entirely possible that they are not original.

Carlos Ghosn (pronounced “Goan”) is the hard-driving CEO of Nissan. Over a year ago, in dedicating Nissan’s new plant in Smyrna, Tennessee, he mentioned some curious figures. When fully running, he said, the new plant would produce 150,000 Leafs annually and 200,000 battery packs.

If doesn’t take a genius to notice the discrepancy in number. The extra 50,000 battery packs amount to 33% of the car production. So what are they for?

There are only three possibilities. First, Ghosn might have had so little confidence in the battery packs’ reliability that he wanted 33% spares for warranty service to insure drivers’ confidence in his cars.

That explanation is possible but unlikely. The only major problems reported so far with either the Volt’s or Leaf’s battery packs are fires that sometimes occur after destructive crash testing. Major crashes don’t occur that often, certainly not in one-third of cases.

Second, Ghosn might have wanted Nissan to go into the related business of home battery packs. The Leaf’s (and Volt’s) battery packs have enough capacity to power the average household for several days, apart from any electric space heating. With proper electronics—no more complicated than the Leaf’s own—they could solve the intermittency problem for wind and solar power on a household-by-household basis.

Most Leaf owners will charge their cars at night, in between commutes to work. But the sun shines during the day, when the cars are at work. So consumers who want to install solar arrays on their roofs to charge their cars off the grid (and without coal’s massive pollution) could use an extra battery pack.

Finally, Ghosn might have had in mind precisely the business model discussed in this post: an infrastructure with spare fully-charged battery packs ready to install, in a mere five or ten minutes, in electric cars traveling long distances.

Ghosn was coy about his precise intentions. But he did mention Nissan’s massive investment in infrastructure.

Reporters’ and readers’ eyes glaze over with talk about “infrastructure.” But it’s vital to widespread use of any form of energy. How do you think your electric power gets to you from today’s remote and gargantuan nuclear, coal and hydroelectric power stations, by magic?

Tomorrow’s wind, solar and natural-gas generators will change our energy infrastructure considerably. They are all scalable, and natural-gas plants are the best short-term solution [search for “complements”] to the intermittency of wind and sun.

We don’t have to build massive, remote generators any more just to realize economies of scale. Another decade or two will see wide dispersal of power generation by wind, sun and natural gas, which will put power sources much closer to users and relegate our robust national grid to backup and intermittency-proofing.

Likely Ghosn was thinking about all this when he made his Smyrna announcement. But he didn’t want to be too specific and tip off competitors, including Bob Lutz at GM.

In our modern energy era, it’s not enough to be a “car guy” like Lutz. You have to be an “energy guy,” too. Among other things, that means using math for more than just building reliable machines. It means using statistics and probability to predict how far most electric cars will drive (on the average), how many spare, fully recharged battery packs they will need, and where service stations to swap them for discharged ones should be. There must be a lot of math behind that 33%-spares number.

Our telecommunications industry knows this story well. Decades ago, AT & T developed a whole new branch of statistical math in order to compute how little it could spend on telephone infrastructure and still let the average consumer have a dial tone and a long-distance trunk line when needed. The new branch of math it developed helped advance the progress of thermodynamics and statistical physics.

Of course you could “overkill” the investment and spend too much. But AT & T was frugal and didn’t. It used its head—and math—instead.

The same is true of cell-phone providers today. That’s why the phone system works perfectly in normal times but breaks down under overwhelming load during emergencies like 9/11. No statistics can predict the anomalous loads and abnormal traffic of days like that, even far from “Ground Zero.”

If Ghosn thought of all of this, he is truly a genius, at least as compared to his competitors. But that what it takes to succeed in transportation today. Transportation takes energy, and energy is getting scarce, tricky, multifaceted and expensive. So you have to understand energy as much as how to build machines that roll. Ghosn may be the first car-company CEO to ken that point well enough to succeed in today’s environment.

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  • At Fri Apr 13, 09:44:00 PM EDT, Anonymous Maqx said…

    The leasing idea is very intriguing and I'm glad you posted a SOLUTION to the electric cost problem.

    Some thoughts I had on leasing whilst reading the article:

    1. It is a very good incentive for gas stations. Most make very little profit on gas. It's the beverages, cigs and food that fuel their profit. Occassionally, some will get additional revenue with an attached car wash and/or auto shop.

    2. The leasing would seem to be complicated to setup and manage for gas stations. This is an operational and technology hurdle that can be overcome. I feel the leasing entities will eventually face consolidation due to the economic pressures of increasing transactional efficiency. Think of a Visa or MC like network.

    3. One thing that would discourage leasing is that some not insignificant percentage of gas stations (I could not find a reliable stat) are attached in some partner form to a large oil corporation. Would Big Oil want or allow their chains to promote a system that would erode their ability to sell their refined goods? How can these stations be incentivized?

    4. Large independent station chains like Wawa and Quiktrip would be prime candidates for leasing as they have a large, corporate owned footprint of stations and can maintain consistency of service and provide economies of scale over mom and pop operations.

    The part I like the most about this is the psuedo-regulation of the battery packs. This can open a tremendous amount of innovation and industry.

    I'd be intrigued to see startup biz models for this industry. I expect there to be a few. Heck Jay, I expect you might have a couple lying about in Excel!!

  • At Sat Apr 14, 11:50:00 AM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    Dear Maqx,

    Thanks for your thoughtful comment. I agree with your view that battery-pack charging and swapping could provide a new “lease on life” for gas stations, and a new source of revenue.

    This “solution” is not just an intriguing idea. I think it’s actually going to happen. It seems the most logical use for the annual production of 50,000 extra battery packs that Carlos Ghosn announced for the new Leaf plant in Smyrna, Tennessee. That’s a lot of battery packs, far too many for warranty service!

    Your points 2 and 3 are legitimate, but I don’t see them as serious obstacles. The easiest way to set up the system would be for each car maker to have separate agreements with independent service stations. These agreements need not involve the driver; only the initial car-purchase agreement would. The owner's manual would have an insert showing where to swap battery packs locally.

    The agreements between car makers and stations would provide a reasonable profit, insure the stations against theft, loss or damage to battery packs, and allow the car-maker to remove and replace battery packs for such reasons as charge-cycle deterioration, improvements, recycling of lithium and recalls. Probably the car maker would retain title to the packs, in a sort of “consignment” relationship. In an ideal world, the car maker would take most of the risk but would split the profits of these operations fairly.

    That brings us to your Point 3, which is critical for service-station owners. Years ago, an antitrust decision gave station owners the right to sell different brands of gas. But today, although independently owned, most are franchises. Stiff and often unfair agreements with a refiner or major oil company control their operations.

    A statute called the Petroleum Marketing Practices Act tries to curtail the big boys’ worst predatory practices. So do our antitrust laws. But these laws are not usually enough to protect the little guy. That’s a constant battle, as these stories show (1 and 2). Fortunately, politicians often pay attention, because service stations are numerous and in the public eye.

    Probably car makers will own and operate the first battery-swapping stations. Or they might make them part of the service portion of car dealerships, especially flagships. (I expect one of these options is what Nissan will take first.)

    But as this concept expands, it will be impractical for car makers to control all battery-pack charging and swapping directly. We will need a nationwide network of stations like the one that exists for gasoline now. At that point, a fair and mutually beneficial dealership agreement could give both the electric-car industry and independent service stations much-needed boosts.



  • At Sat Apr 14, 12:02:00 PM EDT, Blogger Jay Dratler, Jr., Ph.D., J.D. said…

    P.S. (to Maqx):

    One more thought: this new development gives service stations a golden opportunity to restructure and improve their relationships with suppliers. They will be dealing with a whole new class of suppliers—car and battery-pack makers, rather than major oil companies and refiners.

    The electric-car industry is still in its infancy. That, of course, is the best time to bargain.

    So now is the time for service-station owners and their trade associations to start thinking about how they would like these relationships to be structured. If I were the owner of a chain of service stations, or an officer in a trade association, I'd start thinking about these things right now.




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