CMU study finds small battery PHEVs and gasoline hybrids the least-cost policy solution to reducing gasoline consumption

Comparison of current federal subsidy to base case assumptions showing lifetime fuel savings (HomeEve charging scenario). An EPA estimate based on the Chevy Volt’s reported efficiency is also included for comparison. The federal subsidy significantly favors larger battery packs to a stronger degree than their potential for additional gasoline savings. Peterson and Michalek 2012. Click to enlarge.

In an new study analyzing the cost-effectiveness of policies subsidizing electric-drive vehicle battery capacity and charging infrastructure installation to reduce gasoline consumption in the US, Scott Peterson and Jeremy Michalek of Carnegie Mellon University found that, under a wide range of scenarios, the least-cost solution is for more drivers to switch to low-capacity plug-in hybrid electric vehicles (PHEVs) or gasoline-powered hybrid electric vehicles (HEVs).

Comparing the subsidy necessary to achieve lifetime cost parity with the least-cost option for each vehicle class in the base case, they found that the maximum cost per gallon saved for increased all electric range (AER) is 5%–40% less than the minimum cost per gallon saved when installing charging infrastructure, depending on vehicle class. Looking forward as battery prices decrease and the AER resulting in maximum life-time cost savings increases, the relative value of plugging in multiple times throughout the day will also decline, they suggest. Their paper is available online in the journal Energy Policy.

(A 2011 paper by Michalek and colleagues found that strategies to promote adoption of HEVs and PHEVs with small battery packs offer more social benefits (i.e., air emissions and oil displacement benefits) in the near term per dollar spent than PHEVs and battery-electric vehicles (BEVs) with large battery packs providing longer electric range.)

Non-domestic charging infrastructure is generally not necessary for operation of PHEVs, and substantial gasoline displacement can be achieved solely with home charging. In contrast, the limited range of BEVs make non-domestic charging infrastructure more critical if the vehicles are to be used as primary vehicles. But public investment in either large-battery vehicles or charging infrastructure generally produces fewer benefits per dollar spent than investment in small-battery PHEVs (Michalek et al., 2011), suggesting that subsidizing sales of BEVs and installation of charging infrastructure are not the most efficient use of limited public funds.

If the purpose of existing federal PHEV subsidies is to reduce gasoline consumption, this implies that the policy subsidizes 4 kWh battery PHEVs at ~$1.25 per gallon saved while subsidizing 16 kWh battery PHEVs at roughly $4.50 per gallon saved, ignoring indirect effects. It is clear that federal subsidies are not currently aligned with the goal of decreased gasoline consumption in a consistent and efficient manner. Other relevant policy objectives, including reduction of emissions externalities, encouragement of technology development, and job creation do not show clear benefits of favoring large battery packs over small battery packs.

—Peterson and Michalek, 2012

Current Federal subsidies
The American Recovery and Reinvestment Act of 2009 (ARRA) provides a tax credit of $2,500 per PHEV sold (minimum 4kWh capacity) and an additional $417 for each additional kWh of battery capacity in excess of 4 kWh. This is capped at $7,500 for vehicles with a gross vehicle weight less than 14,000 lb.
This subsidy for a specific OEM’s vehicles declines to 50% then 25% in a phase-out period, which begins in the second calendar quarter after that manufacturer has sold 200,000 vehicles and lasts four calendar quarters.
The US Department of Energy (DOE) also granted $37 million for installing 4,600 charge points in specific markets around the US (>$8,000 per charge point) and granted $99.8 million to fund the EVProject, which is installing 14,000 Level 2 (208–240 V) chargers and a variety of other infrastructure and monitoring equipment.

To estimate the costs and gasoline savings of each approach, they calculated gasoline and electricity use by PHEVs of varying battery capacity under a range of charging scenarios. They then estimated the necessary charging infrastructure to enable each charging scenario, and then used the estimates of cost and gasoline displacement to compare across options.

In all cases, HEVs and PHEVs save gasoline over conventional vehicles. HEVs and some PHEVs can save both gasoline and total lifetime costs over conventional vehicles both at normative and observed implicit discount rates. They also found that the additional cost per gallon saved of alternatives—other than the least-cost option in each case—is higher than oil premium estimates, and charging infrastructure is orders of magnitude more expensive per gallon saved, even with optimistic assumptions for charging infrastructure. Peterson and Michalek deemed the findings robust across a wide range of sensitivity scenarios (available in the the supplemental information of the paper).

The authors suggest that redesigned policy should consider:

• Subsidize usable capacity, rather than total capacity. The Chevy Volt, for example, uses only about 65% of its 16 kWh capacity in order to improve safety and battery life. However, current federal subsidies are tied to total battery capacity rather than usable battery capacity or AER—i.e., it incentivizes the use of larger battery packs.
  Subsidizing usable capacity would remove the disincentive for automakers to figure out how to use a larger portion of the battery. Alternatively, subsidizing based on AER (as measured in a standardized test) would also encourage automakers to make vehicles more efficient, and removing the exclusion for lower-capacity lower-range vehicles would be more consistent with potential benefits.
• Subsidize estimated gasoline savings rather than battery capacity or AER. PHEVs have diminishing returns in gasoline savings as battery capacity increases. Subsidies intended to generate gasoline savings would be better if tied to estimated gasoline savings rather than battery capacity or AER, the authors suggest, and subsidies that are tied to battery capacity or AER should avoid a fixed rate per kWh or per mile and instead reflect the structure of diminishing returns.
  However, they add, methods for estimating gasoline savings may be controversial, and depending on what reference point is used, subsidies tied to gasoline savings could have unintended consequences, such as the potential for separate reference points in each vehicle class encouraging consumers to purchase larger vehicle classes.
• Consider temporary larger subsidies. The current subsidy of $2,500 for 4 kWh (~$1.25/gal saved) and $7,500 for 16kWh (~$4.50/gal saved) pays prices substantially higher than US oil premium estimates of $0.37/gal ($0.08–$0.96/gal). Subsidies intended to generate gasoline savings would preferably be comparable to the social value of gasoline savings (and the value of other social benefits). To the extent that larger subsidies are able to kick-start adoption and sustainable market acceptance of plug-in technologies that would not otherwise be adopted, temporary larger subsidies may be warranted. But the magnitude or duration of this dynamic effect remains highly uncertain.
• Target the goal, not the technology. More efficient policies generally target the policy goal, such as gasoline displacement, directly rather than a proxy, such as battery size.
  On economic efficiency grounds, subsidies are justified insofar as they correct for positive externalities, such as innovation knowledge spillover, and research funding is an alternative to subsidizing sales for achieving this effect.
  A more efficient way to address negative externalities is to apply Pigovian taxes (e.g., a carbon tax), which would increase the price of gasoline and make plug-in vehicles more competitive in the marketplace while encouraging the most efficient responses to reducing externalities, including not only alternative powertrains but also efficiency improvements and incentives to drive less and purchase smaller vehicles (as well as to make changes in other sectors of the economy). They authors acknowledged the political challenge of increasing or creating a tax.
• CAFE. Considering the presence of binding CAFE standards, the authors raised the question of whether EV subsidies will provide any net gasoline savings for the foreseeable future

Ignoring interactions with CAFE policy, HEVs and PHEVs with low AER and only home charging generally provide the largest direct gasoline savings per dollar spent, offering both lower costs and lower gasoline consumption than CVs, depending on the consumer’s discount rate. It is therefore possible that incentivizing a larger number of consumers to purchase HEVs or low-AER PHEVs would save more gasoline under a fixed policy budget than incentivizing a relatively smaller number of consumers to purchase high-AER PHEVs. However, given a fixed market of electrified vehicle adopters, if more gasoline savings is needed than what can be achieved with HEVs and low-AER PHEVs, additional savings can be achieved more efficiently by paying for additional AER than by paying for extra charging infrastructure.

—Peterson and Michalek, 2012

Source: Green Car Congress