Increasing electric vehicle policy efficiency and effectiveness by reducing mainstream market bias

Communication Increasing electric vehicle policy efficiency and effectiveness by reducing mainstream market bias Erin H. Green a,n, Steven J. Skerlos b, James J. Winebrake c a Green Energy Consulting, 88 Berkeley Street, Rochester, NY 14607, 1-585-738-6864, USA b University of Michigan, USA c Rochester Institute of Technology, USA H I G H L I G H T S � We argue that U.S. electric vehicle policies are inefficient and ineffective. � We introduce “mainstream consumer bias” as an explanation for policy deficiencies. � We propose an alternative policy agenda to address some of these policy problems. � Proposed policy options include strategic niche management, targeted R&D and incentives, and loans. a r t i c l e i n f o Article history: Received 30 July 2013 Received in revised form 8 October 2013 Accepted 9 October 2013 Available online 6 November 2013 Keywords: Plug-in electric vehicles Technology diffusion Transportation Policy effectiveness a b s t r a c t Plug-in electric vehicles (PEVs) provide an opportunity for reducing energy use and emissions in the transportation sector. Currently, a number of federal policies are in place to incentivize deployment of PEVs to mainstream consumers with demographics and vehicle attribute preferences most common to today's new vehicle purchasers. This article argues that policies intending to give PEVs a foothold in the market should not focus on mainstream consumers and should instead focus on niche markets—specifically carsharing and postal fleets—and early adopters including green consumers. Two arguments can be made in support of eliminating the mainstream market bias of current policies toward a policy of cultivating niche markets. The first is efficiency: so far PEV policies featuring a mainstream market bias have proven to be inefficient and costly. The second is effectiveness: it is becoming increasingly evident that PEV policies would be more effective in achieving potential societal benefits if they focused on early adopters and niche markets using such approaches as strategic niche management, accessible loans and financing, and appropriately targeted incentives. PEV policies focused on early adopters and niche markets would create complementary system effects that will lead to increased PEV market penetration and realization of intended societal benefits. & 2013 Elsevier Ltd. All rights reserved. 1. PEV policies and mainstream market bias “Electric cars are at a fork in the road, with oblivion lying in one direction, and the mass market in the other” (Lochhead, 2013), begins a February 2013 U.S. popular press article on the future of plug-in electric vehicles (PEVs). Despite extensive government programs and incentives, PEV sales in the U.S. reached only �53,000 in 2012 (0.3% of vehicle sales), far below levels required to meet the Obama administration's goal of one million PEVs on the road by 2015 (EDTA, 2013; Shepardson, 2013; whitehouse.gov, n.d.). It is now clear that the one million vehicle threshold will not be achieved by 2015. This is because the goal was disconnected from market- and technology-constraints and, as a result, strictly dependent on how much the U.S. government was willing to spend to achieve it. As PEV policy costs mount—with an expectation to exceed $7 billion by 2019 (CBO, 2012)—and the success of PEV policy increas- ingly in doubt, PEV policy strategy is also at a fork in the road. The government can continue to offer generous subsidies to prop up EV purchases within the mainstream market, or can choose to spend the money to nurture PEV niche markets, thus realizing the societal benefits of PEVs more efficiently and effectively. In this paper we reveal problems associated the mainstream market bias of today's PEV policy and discuss policy mechanisms that would result in more efficient and effective deployment of PEVs. 2. PEV policy failures resulting from mainstream market bias Policies to encourage PEV adoption generally fall into three categories: (1) research and development (R&D); (2) investments Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/enpol Energy Policy 0301-4215/$ - see front matter & 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.enpol.2013.10.024 n Corresponding author. Tel.: þ1 585 738 6864. E-mail addresses: [email protected], [email protected] (E.H. Green). Energy Policy 65 (2014) 562–566 in charging infrastructure and electric vehicle service equipment (EVSE); and, (3) vehicle tax credits or rebates.1 Although these policies are intended to address the primary barriers to mainstream PEV adoption2, we argue in Sections 2.1–2.3 that each category of PEV policy contains a mainstream market bias that threatens the ability of these policies to achieve the intended goals. 2.1. Mainstream bias in R&D expectations A number of federal R&D efforts are explicitly aimed at main- stream consumers. The US EV Everywhere initiative, for instance, has a goal of producing PEVs with “sufficient range and fast- charging ability to enable average Americans everywhere to meet their daily transportation needs more conveniently” by 2022 (U.S. DOE, 2012b). The U.S. Department of Energy (DOE) notes that increased range and decreased cost “are essential to achieving mass market adoption” (U.S. DOE, 2013c). Thus, R&D goals include ambitious targets such as “a battery that will go 300 miles on a single charge” (whitehouse.gov, n.d.) and as a result substantial resources are being invested to meet these mainstream market goals. For instance, Congress approved $330 million in funding for battery and vehicle research in 2012; President Obama proposed allocating $2 billion over 10 years on R&D for advanced vehicles including PEVs; and the proposed 2014 budget includes $575 million for DOE vehicle research (LeBeau, 2013; Loveday, 2013; Shepardson, 2013; The White House Office of the Press Secretary, 2013). The underlying assumption for justifying such investments is that PEVs must rival conventional vehicles in all respects in order to be viable market contenders. However, advancements in PEV performance to achieve mainstream penetration often fail to reduce—and may increase—costs in the short term, thereby pricing them out of reach for most consumers (Axsen et al., 2011; Dijk et al., 2013). More importantly, these investments crowd out other investments that would bring more basic PEV designs to market, and which ultimately may be more attractive for early adopters. For example, Axsen et al. (2010) found that potential early adopters chose lower-performance PEV battery designs than those assumed by experts, and that their expectations could be met with existing battery technology. 2.2. Mainstream bias in charging infrastructure investments Investment in charging infrastructure is central to US PEV policy. The Alternative Fuel Infrastructure Tax Credit offers up to 30% of the cost of PEV charging infrastructure; the U.S. DOE Transportation Electrification Initiative provided nearly $20 mil- lion to facilitate the creation of 4600 charging stations; and the $230 million EV Project (about half of which is federally funded) builds and monitors “mature” EVSE networks in several cities (CBO, 2012; EV News, 2013; Smart and Schey; U.S. DOE, 2012a, 2013a). These efforts presuppose that in order to meet the needs of mainstream PEV drivers, a dense, elaborate network of charging stations is required. This assumption likely derives from experience with other alternative fuel vehicles (AFVs), which face the “chicken- and-egg” problem: people will not purchase AFVs without adequate fueling infrastructure, and fuel providers will not invest in infra- structure until a critical mass of AFVs is achieved (McNutt and Rodgers, 2004; Melaina and Bremson, 2008; Meyer and Winebrake, 2009; Struben and Sterman, 2008; Winebrake and Farrell, 1997). However, “chicken-and-egg” does not quite apply to early PEV markets since the charging infrastructure challenge is fundamen- tally different than other AFVs. Most importantly, more than half of US households already have the ability to charge PEVs at home (Axsen and Kurani, 2012; Zpryme, 2010), so in effect millions of “charging points” already exist throughout the US (U.S. DOE, 2011). A 2012 survey of PEV owners found that virtually all charge their vehicles at home, and one-third use a simple 120-volt outlet to do so (J.D. Power and Associates, 2012). According to a City of New York study, early adopters do not require a high density public charging network but instead need the capability to charge at home, whether in a personal or commercial garage (NYC). As Kley et al. (2011) observe, “range anxiety” is more psycho- logical than physical, and pilot programs in Europe have shown that public charging infrastructure is rarely used. In fact, in most EV Project cities each publicly accessible Level 2 EVSE is used on average once every 5–10 days (0.1–0.2 charging events per day— compared to 0.9 charging events per day for residential Level 2 EVSE), and DC Fast Chargers are used less than four times per day on average—effectively 5% of the time available (Ecotality, 2013a; Ecotality, 2013b; Kley et al., 2011). Investments in public PEV charging infrastructure, therefore, may offer marginal value in realizing the intended benefits of PEV adoption. In fact it has already been shown that EVSE investments are less cost-effective than increased PEV battery range, viewed in the context of reduced petroleum consumption (Peterson and Michalek, 2013). So in effect millions are being spent on public EVSE to alleviate mainstream consumers’ range anxiety, while failing to signifi- cantly increase PEV adoption. 2.3. Mainstream bias in tax credits In 2009, the US government established a Plug-in Electric Vehicle Tax Credit, which allows PEV purchasers to deduct between $2,500 and $7,500 from their federal income tax liability, depend- ing on battery capacity and vehicle weight (CBO, 2012; U.S. DOE, 2013b)3; President Obama has proposed increasing the tax credit cap to $10,000 (LeBeau, 2013). According to the Congressional Budget Office (CBO), the PEV tax credit is too small to stimulate a significant amount of new consumer demand (CBO, 2012; Deloitte, 2011), and most taxpayers do not have a tax liability great enough to even use the credit (only 20% of taxpayers had an estimated tax liability of $7500 or more; and only 40% had a $2500þ liability in 2011). Thus, the majority of PEV tax credits will subsidize pur- chases that would have happened anyway without the tax credit and will have little-to-no effect on petroleum displacement and emissions reduction (CBO, 2012). 3. Benefits of re-focusing PEV policy on niche markets To design more cost-efficient and effective policies to encou- rage PEV deployment, it is necessary to eliminate mainstream market bias and consider a target audience of early adopters– consumers who care about the environment and are willing to accept tradeoffs in features and price in order to achieve the 1 Additional incentives targeted at the general public include, for example, use of HOV lanes, reduced taxes or fees, and preferential electricity rates for PEV charging; however these require relatively minor investment of government resources, and are not expected to have significant impacts on PEV market penetration. Here we limit our discussion to the three policy categories outlined above. 2 The primary barriers to mainstream PEV adoption include: higher upfront cost; limited range; reliability concerns; limited charging infrastructure; and long charging time (Browne et al., 2012; Carley et al., 2013; ConsumerReports.org, 2012; Deloitte, 2011; Egbue and Long; J.D. Power and Associates, 2012; Zpryme, 2010). 3 Several states and localities also offer financial incentives to reduce the upfront cost of PEVs (U.S. DOE, 2013a). E.H. Green et al. / Energy Policy 65 (2014) 562–566 563 energy and environmental benefits of driving a PEV (Axsen et al., 2012; Carley et al., 2013; Heffner et al., 2007; J.D. Power and Associates, 2012; Klein, 2007; NYC; Ozaki and Sevastyanova, 2011; Tran et al., 2012; Turrentine and Kurani, 2007; Zpryme, 2010). Evidence from this previous body of the literature indicates that efforts to encourage PEV adoption should focus on making PEVs accessible to consumers and markets valuing the specific char- acteristics of PEVs, rather than attempting to alter PEV technology prematurely to earn acceptance by mainstream consumers. Increased PEV market penetration and achievement of societal benefits would likely occur more efficiently by focusing policy mechanisms on niche opportunities created by the unique character- istics of PEVs. In this journal previously, we argued for focused PEV tax credits that would allow clusters of users to build in certain geographic areas, especially where social benefits are great (e.g. regions with clean electricity profiles) (Skerlos and Winebrake, 2010). In this paper we extend this thinking beyond geographical reach to service sector and policy formulation, based on theory associated with the use of different policy mechanisms for certain conditions and technologies (Caniels and Romijn; Dijk et al., 2013; Ieromonachou et al., 2004; Kemp et al., 1998; Nair et al., 2013; Negro et al.; Truffer et al., 2002; Tsoutsos and Stamboulis, 2005; van der Laak et al., 2007). We maintain that in viewing PEV policy through the lens of the early adopter, we can identify policy strategies that may be more cost-effective and conducive to meeting societal goals of reduced emissions and energy consumption—as well as more efficient at moving along a market diffusion curve. We introduce three such potential strategies here: Strategic Niche Management (Section 3.1), Research and Incentives Focused on Early Adopters and Markets (Section 3.2), and Accessible Loans and Financing (Section 3.3). 3.1. Target strategic niches for PEV deployment Strategic niche management (SNM) is a means to introduce innovative technologies into the marketplace by simultaneously addressing technical, policy, social, demand, production, and infrastructure barriers. The SNM approach aims for sustainable diffusion of technology by identifying niches where the unique strengths and benefits of a technology are maximized, and where any barriers and challenges are minimized. As a result SNM provides the concentrated focus, learning, and social networks necessary for a self-sustaining diffusion of technology (Axsen and Kurani, 2011, 2013; Caniels and Romijn; Ieromonachou et al., 2004; Kemp et al., 1998; Nair et al., 2013; Truffer et al., 2002; Tsoutsos and Stamboulis, 2005; van der Laak et al., 2007). Some have proposed that carsharing4 is an appropriate techno- logical and market niche for PEVs, noting recent trends that enable coevolution of carsharing and PEVs (Dijk et al., 2013; Kley et al., 2011). Evidence suggests that policy support for carsharing using PEVs, along with associated targeted infrastructure, would synergis- tically benefit both objectives while potentially increasing cost- effectiveness of government PEV deployment support. Several findings support this proposal. For instance, Dijk et al., (2013) and Kley et al., (2011) note that carsharing organizations (CSO) eliminate the purchase price burden of PEVs for members, reduce automobile operating costs, and address range anxiety by allowing members to choose a car “fit for the trip” (e.g., a PEV for shorter trips and a conventional or hybrid vehicle for longer trips). Carsharing saves members an estimated $150 to $430 per month (Shaheen et al., 2012), and improves PEV cost-effectiveness, as higher utilization allows capitalizing on lower fuel costs per mile (Kley et al., 2011). And CSOs are suited to urban areas, where dense land use equates to fewer daily vehicle miles traveled (VMT), meaning range limitations are less likely to be an issue (FHWA, 2011). Carsharing also addresses the barrier of limited charging infrastructure. While many rural or suburban homes have personal garages or carports, most apartment buildings in urban areas do not (Axsen and Kurani, 2012; U.S. DOE EERE, 2011, March 7). Carsharing can employ charging in central facilities or designated on-street parking, thereby making PEVs accessible to millions of households where at-home charging is impossible. Carsharing inherently furthers the societal goals of PEVs. Several studies have demonstrated environmental and energy benefits of carsharing in the U.S., finding that CSOs reduce VMT by 8–80%, GHG emissions by 27–43%, and vehicle ownership by 50% (Kriston et al., 2010; Lué et al., Paruscio; Shaheen et al., 2012). And as Skerlos and Winebrake (2010) note, health effects are a function of population and pollution concentration, so PEV use in urban areas may result in greater health benefits compared to use in rural areas; city driving also reduces PHEV GHG emissions compared to highway driving (Raykin et al., 2012). Positive attributes of PEVs may also support demand for CSOs, resulting in complementary and sustainable markets. CSOs appeal to social activists, environmental protectors, and innovators (Burkhardt and Millard-Ball, 2006; Shaheen and Cohen, 2013), so PEVs may draw more members to CSOs. And carsharing participants have indicated willingness to pay more to use zero-emission vehicles—at a premium that would result in a positive return for a CSO (Kriston et al., 2010). Public investments in CSOs would be comparably cost-effective, as the cost of each vehicle is spread among many drivers (the U.S. member-to-vehicle ratio exceeds 50) (Shaheen and Cohen, 2012, 2013). Carsharing charging points will have a ready- made market, ensuring higher utilization. For instance in the San Diego PEV CSO program, CSO vehicles have recently been responsible for one-quarter to over half of charging on EV Project Level 2 public EVSE, and EVSE usage (events per day and duration) is twice that of other EV Project cities. (Ecotality, 2013a; Ecotality, 2013b). As a result, targeting PEV policy mechanisms toward carsharing organizations would have multiple compounding and self- reinforcing benefits. Policies that could encourage PEV use in carsharing include: financial incentives to cover the vehicle incremental costs or infrastructure installation in CSOs; incentives for establishment of CSOs in cities and towns where systems currently do not exist; and, incorporating PEVs and charging infrastructure into government fleets where carsharing exists (Howard, 2012). U.S. Postal Service (USPS) delivery vehicles may present another strategic niche opportunity for PEVs, for similar reasons including centralized fleets for charging, and urban routes. Already UPS and FedEx are experimenting with all-electric vehicles with a relatively high range of over 50 miles (King, 2013). The average USPS delivery route is only 17 miles with 84% having a range of under 24 miles (GAO, 2011, 2013; USPS, 2009). US Postal routes would also be expected to contain less high-speed driving and shorter distances between starting and stopping than the commercial carriers, which play into the strengths of electric vehicle technology. Geo- graphic and temperature challenges would prompt the technology development as the USPS operates in all the climates that consumer EVs would. Investments in PEVs within USPS might achieve more visibility for PEVs at less cost than today's consumer vehicle subsidies. The USPS fleet is the largest in the world with over 140,000 mail delivery vehicles reaching 130 million addresses (GAO, 2013; USPS, 2009). Many USPS delivery vehicles are already reaching the end of their operational life (GAO, 2013) and a 2009 USPS analysis 4 Carsharing is a service whereby many drivers share amongst a pool of vehicles. Carsharing has seen a rapid increase in the U.S., reaching 800,000 members by mid-2012 (Shaheen and Cohen, 2012). E.H. Green et al. / Energy Policy 65 (2014) 562–566564 found that the net cost for 3000 PEV delivery vehicles, charging infrastructure, replacement batteries, and training would have a positive net present value5 (USPS, 2009). Rather than offering general tax credits to consumers who may have purchased PEVs regardless, the federal government might strategically offer funding to the USPS to replace aging vehicles with PEVs, resulting in potentially greater fuel and emissions savings at a lower cost. USPS estimates an upfront cost of $40,000 per PEV delivery vehicle (USPS, 2009); if the cost were correct, $2 billion could purchase 50,000 vehicles outright—or cover incremental costs of 100,000 or more, potentially with a positive net present value to the federal government. 3.2. Focus research and incentives on early adopters and markets After considering policies aimed at strategic niches, we propose that the government target incentives at early adopter markets and “green consumers”. Research on PEV markets shows that early adopters are typically interested in PEVs for their efficiency and environmental performance rather than the advanced technology, styling, or other offerings. Green consumers are also more likely to accept tradeoffs in vehicle features in order to achieve these benefits (Deloitte, 2011; Heffner et al., 2007; J.D. Power and Associates, 2012; Klein, 2007; NYC; Ozaki and Sevastyanova, 2011; Tran et al., In Press; Turrentine and Kurani, 2007). In the short term policymakers could focus on bringing down the cost of PEVs by identifying the performance, features, and costs acceptable to early adopters and most ideal for niche markets —which may differ substantially from current designs or govern- ment targets. For instance, Axsen et al. (2011) elicited PHEV designs from potential buyers, finding that most chose vehicles with the least all-electric range and the lowest cost. Yet with consumer-informed recharge profiles, the designs resulted in GHG reductions equal to (or greater than) those of the costliest PHEVs with the highest all-electric range (Axsen et al., 2011). Focusing on early adopter niches rather than the mainstream market may also allow elimination of superfluous amenities, thus making PEVs financially accessible to early adopters who are willing to make such tradeoffs. There is certainly room for improvement in this regard, as most of the retail price of a CV is no longer due to the basic components necessary to move the vehicle. In 2010, accessories such as power seats, navigation and telecommunication added $10,600 to the price of an average vehicle—44% of capital costs (compared to 1% in 1967)6 (U.S. DOE EERE, 2012, January 2). Not only costly, accessories and features often detract from environmental performance by increasing vehicle energy consumption (Kemp et al., 1998). Near term research efforts might be directed toward identify- ing the “sweet spot” or optimal PEV design for early adopters and niches (e.g., carsharing or USPS investments), where nonessential amenities are reduced, and tradeoffs are considered acceptable in order to bring PEV costs within financial reach, thus yielding increased deployment of PEVs in the short term at a lower net cost. 3.3. Make loans and financing more accessible for PEVs Incremental cost is commonly accepted as a primary barrier to PEV adoption, but the financial barrier takes different forms: ability to pay and willingness-to-pay (Skerlos and Winebrake, 2010). In the U.S., most people obtain new vehicles through financing rather than paying the full price upfront. Therefore the real cost differential for many is the increased monthly payment, a large portion of which can be immediately offset or eliminated with fuel savings (Al-Alawi and Bradley, 2013). Potential early adopters are more likely to be aware of PEV fuel savings, and willing to pay more for PEVs in order to realize fuel savings or environmental benefits (Hidrue et al., Gardner; J.D. Power and Associates, 2012; NYC; Tran et al., 2012). However, the ability to pay is hindered by the financing process. Even if potential buyers realize that fuel savings would bring monthly PEV ownership costs to an affordable level, many might not qualify for a loan, as fewer people will qualify for the higher loans associated with PEVs’ greater upfront capital costs. The financing process generally ignores fuel economy and estimated fuel expenditures, so a customer might be eligible to finance a large, inefficient truck with a low sticker price, but ineligible for PEV financing even though total monthly costs (amortized capital and operational costs) are equivalent. A similar situation exists in the housing market, where efficient homes reduce monthly energy expenditures. To account for this differential, lenders have developed “Energy Efficient Mortgages,” which consider a home's energy efficiency in the mortgage approval process, allowing borrowers to qualify for larger loans on more efficient (and expensive) homes (U.S. EPA, 2013; U.S. HUD, 2013). By incorporating fuel costs into auto loan approval criteria, PEVs and other efficient vehicles would be more financially accessible, while large, inefficient vehicles would be less accessi- ble—extending the energy and environmental benefits of the policy beyond those directly attributable to PEVs. Governments might offer efficient vehicle loans, encourage or require lenders to incorporate fuel economy into loan qualification calculations, or develop toolkits for lenders to use in making appropriate calcula- tions. Such loans would reach a larger market of eligible custo- mers, would incentivize broad-scale GHG and energy use reductions, and would be less expensive than tax credits, lever- aging untapped opportunities in market mechanisms. 4. Conclusion Opportunities exist to create more efficient and effective policy mechanisms to incentivize a growing market for PEVs. Existing policy mechanisms that aim to thrust PEVs immediately into the mass market demonstrate a “mainstream market bias” and are proving to be inefficient, costly, and ineffective. Instead, policy should be refo- cused to concentrate on early adopters and niche markets using such approaches as strategic niche management, targeted incentives, and more accessible loans and financing. Whether policies should be focused on niche markets indefinitely remains to be seen; at some point, of course, niche markets need to establish themselves into self- sustaining markets. Any anticipated sunset date for the refocused policy strategy is also uncertain. But establishing a sunset date for such policies is premature and should be done after careful evaluation of the policy's effectiveness in achieving its intended goals. 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