The overlooked EV opportunity
The Overlooked EV Opportunity
The typical private Battery Electric Vehicle (BEV) driven 10,000 miles per year consumes 3,400 kWh or 31% of the average annual residential household electric use. That same BEV releases 40% – 70% less CO2 to the atmosphere than its internal combustion (ICE) counterpart, depending on the local generation mix, ambient temperature, and other factors. Clearly, promoting the adoption of electric vehicles (EVs) offers electric utilities the opportunity to increase sales, improve financial results, and contribute to local carbon and tailpipe emissions.
Given the clear business and public benefits of vehicle electrification, the key question facing electric utilities how best to promote EV ownership and use. To date, electric utilities have implemented a wide range of activities to promote EV adoption and shape EV load, including:
- Time of use rates and rebates to move charging off peak.
- Incentives to residential and commercial customers to purchase EVs.
- Incentives to residential and commercial customers to install EV charging equipment or EVSE.
- Incentives to facility owners or direct installation of public charging stations.
Recently, DNV GL completed a comprehensive review of regulatory policies and utility programs to promote EVs. We found that less than 5% of the 131 initiatives surveyed included initiatives to help commercial fleet owners plan, purchase vehicles, or install the necessary infrastructure for electrification of their fleets. Below we summarize recent work performed for our utility clients which suggests that fleet electrification can play a key role in any EV promotion portfolio, as well as an excellent market entry strategy for utilities.
Market Size and Segmentation
In 2017, the most recent year for which comprehensive statistics are available, there were 1,849,430 light-duty vehicles (LDVs) and 4,365,000 trucks in government and business fleets. Clearly, fleets represent a clear target for promoting electrification of heavy-duty vehicles (HDVs) as they account for over one-third of the total units on the road, even before accounting for transit. Even though fleets comprise a much smaller portion of the LDVs, they nonetheless offer a concentrated target. For example, Minneapolis, MN, a mid-size city of 422,000 had 473 passenger cars and other LDVs in its inventory, as well as 486 heavier road vehicles. The City of Austin plans to acquire 330 EVs over a period of 2 – 3 years. Replacing vehicles as they reach the end of their useful lives for even one such such customer represents a large opportunity for increased sales and reduced emissions.
Business fleets are even more concentrated: the 200 largest fleets comprise over 60,000 vehicles. The largest national companies, such as UPS and Federal Express, are working directly with manufacturers to specify, test, and procure EVs that meet their needs. However, most utilities will be able to identify numerous fleet owners in their service territories who will benefit from electrification.
Table 1: Vehicles in U.S. Fleets of 15 or more, 2017
Source: Bureau of Transportation Statistics, Tables 1-14 and 1-11.
Strong Commercial Potential
Beyond being a large and easily targeted market segment, fleets constitute a strong market for electrification initiatives for the following reasons.
Customer focus on total cost of ownership (TCO). Most sizable businesses and government entities apply concepts of lifecycle costing to vehicle purchases. Since 2017, trends in the relative prices of gasoline and electricity, as well as improved battery and technology performance and durability have brought the total cost of ownership of light electric vehicles in line with those for vehicles with internal combustion engines (ICE), which should make electrification a relatively easy and inexpensive sell. For example:
- A 2019 study by New York City’s Division of Citywide Administrative Services found that the annual total cost of ownership (TCO) for a Nissan Leaf in city service, including amortization of charger installation costs, was $3,621, versus $3,728 for a Toyota Prius Hybrid, and $4,592 for a Ford Fusion.
- The City of Austin forecasted lifecycle (10-year) cost savings of $3.5 million for its planned purchase of 330 electric vehicles, in comparison to purchase of the same number of ICE vehicles.
- In 2017, the City of Minneapolis undertook lifecycle cost assessments of different electrification scenarios, including replacement of HDVs, which are significantly more expensive than their ICE counterparts. The analysis found that all electrification scenarios yielded slightly higher life-cycle costs than the baseline case – in the range of 1% – 3% of the Net Present Value of total costs over 10 years. However, most of these scenarios yielded emissions reductions of 50% or more versus the baseline.
Importance of non-financial benefits. A 2018 survey of fleet managers conducted by GreenBiz and co-sponsored by United Parcel Service (UPS) found that a high percentage of those managers were motivated to purchase EVs by factors other than TCO, most notably meeting organizational sustainability and environmental goals, building reputation with the public, and regulatory compliance. Table 2 summarizes these motivations, as well as reported barriers.
Table 2: Commercial Fleet Manager Motivations and Barriers to EV Adoption (n = 206)
Visibility to customers and stakeholders. Based on DNV GL’s experience in planning, delivering and evaluating customer energy programs, we believe that programs to promote EV adoption among fleet owners will generate much more media coverage and recognition among customers and other stakeholders than efforts targeted to residential customers. Municipal governments and private-sector fleet owners will likely publicize program activities through established channels to enhance their reputations for sustainability. Local press in the participating locations are also likely to cover the vehicle rollouts. Finally, the vehicles themselves can serve as rolling billboards to bring stakeholder attention to the vehicle owners’ environmental initiatives.
Available Financial Resources. There are plentiful sources of non-utility subsidies and asset financing for EVs and EV charging infrastructure. Most prominent among the subsidy sources is the 2016 Volkswagen settlement, under which the company was required to allocate $800 million to the state of California and $1.2 billion to the remaining states for state-administered programs to reduce diesel emissions. Many of the state plans include components to electrify government and business fleets, with emphasis on replacement of transit and heavier vehicles typically powered by diesel fuel. There are additional federal and state grant programs focused on fleet electrification. For example, the California Air Resources Board recently allocated $533 million, primarily from cap-and-trade program proceeds to clean transportation initiatives, including over $180 million for fleet electrification. Additionally, a consortium of nine states in the Northeast is currently developing plans for a cap-and-trade system for transportation fuels.
In addition to subsidies, there is a large and active market for lease financing for both public and private sector fleet vehicles. These financing approaches are well understood and accessible at a scale sufficient to support a rapid transformation in vehicle purchasing practices. Private sector fleets stand to benefit because lessors retain federal tax credits which provides flexibility in pricing. Recently, municipalities in California formed a purchasing consortium for leasing 90 EVs. Through a competitive bid process the municipalities were able to gain pricing concessions from lessors nearly equal to the federal tax credit.
Demonstrable Market Effects. Many of the program approaches utilities have pursued to accelerate EV adoption, such as subsidization of public charging facilities or advantageous rates, operate only indirectly on potential purchasers or come into play only after an EV purchase is made. By contrast, fleet electrification programs target a relatively small and visible set of customers and can therefore be crafted to target specific barriers to EV adoption. In the context of ratepayer-funded programs, this enables sponsors to maximize demonstrable net impact on the market.
Utilities that have made strong forays into the electric transportation have generally used the following two strategies to get started:
Market Engagement.The barriers to EV adoption by fleet managers – high first costs, limited model availability, unproven performance (especially for HDVs) — are well-documented. However, these barriers play out differently in different regions, depending on market size and segmentation. Utilities with successful programs have directly engaged customers through focus groups and surveys to gain an understanding of the precise nature of those barriers and the likely success of program strategies. The relatively small number of potential fleet customers facilitates this kind of engagement.
Leading by Example/Reducing Perceptions of Risk. One study of early utility efforts in the EV market noted that many utilities had initiated their programs by acquiring electric vehicles for their own fleets and studying their performance. This enabled them to generate information about the benefits, costs, and risks of fleet electrification that could they could pass on to customers to help them make their own vehicle purchase decisions. These purchases also served another key value of all demonstration projects, namely to signal to the targeted market that the risks and costs of adopting EV technology are manageable in utility organizations, which are called on to provide critical services.
DNV GL can help you develop electrification strategies for your own fleets or your customers’ fleets — email me to learn more.
 City of Minneapolis, op.cit.