An Electrifying New Business Model
We have a simple theory: a conscious regulatory effort to enable new business models for non-utilities could be a powerful force for change, providing benefits to utilities and producing economic and environmental benefits for consumers.
The point is best illustrated through a story about Charlie, a 30-something living in Indiana, and his experience buying his first new car.
Charlie decides it’s time to get his first brand new car and he’s been reading a lot about electric vehicles. He’d love to get an electric vehicle or a plug-in hybrid but believes they are out of his price range, so he plans on getting a small, efficient conventional car.
Charlie walks into a car dealer’s showroom and is instantly drawn to two popular electric vehicles on the showroom floor, both in his favorite color. As expected, the sticker price on one is beyond his budget but to his surprise the other, which appears to be identical except for the big “Special Offer” sign on the roof, is well within his price range. He turns and asks the approaching sales woman, Cheryl, “What’s up?”
Cheryl says, “The low price is possible because of a great new program offered by the factory.” (In fact, the program is a novel collaboration between the auto manufacturer, PJM, and Morgan Stanley but Cheryl knows from experience that saying it’s a “factory” program is the simplest way to convey the idea to most people.)
“The program starts today. You’ll be hearing all about it during the Super Bowl. That’s when the company will start its marketing campaign.”
Cheryl explains that the cars are identical, but the factory has made a deal with the power company. The power company will pay for part of the car, so long as it, the power company, can control how the car is charged (Cheryl is not a utility expert, so she does not really understand that it’s not really a “deal” or that “power company” really means the regional grid operator and the local distribution companies).
Cheryl opens the hood and points to a little black box. “All electric vehicles have one of these computers. It controls everything about the charging and discharging of the batteries, it has a very accurate GPS, and it’s connected to the internet. This means you can control the charge with your smartphone or the factory can, if you let them.” She hands Charlie a brochure that explains the program. It’s written by the factory, a well-known environmental group, and EPA. Charlie starts reading and, as Charlie’s eyes are about to glaze over, Cheryl turns his attention to the highlighted language on page 2. It says:
- When you plug your car in, press a button that says when you next plan to drive. If it’s more than 10 hours from when you plug in, we guarantee your car will be fully charged by then. However, on most days following a normal daily commute of 35 miles, the vehicle will be nearly fully charged in less than 2 hours (Use your smartphone to change the time if you like).
- We guarantee that the battery will last eight (8) years or 100,000 miles.
- You can override the factory controls any day for just $2 by pressing the big $ button on the dash or by using your smartphone.
Charlie already thought this was a pretty good deal but he had read that some people are concerned about the driving range and battery life if the car is controlled by the electric company. The factory guarantees and override option clinched the deal. So, Charlie decides to buy it and says, “Let’s talk about options and financing.”
Charlie was pushing the limits of his budget so he decided to skip the sunroof and premium sound system, when Cheryl said, “There may be a way to get what you want.”
Cheryl told him that the factory was offering a five-year “fuel-up” option. She explained that, at current gasoline prices, the gasoline version of the car costs 12.5 cents per mile in fuel costs to operate. At current electricity prices, the electric version will cost Charlie 5 cents per mile in electricity costs. Then she said the factory has also made a great deal with the power company to buy the electricity your car will need. “If you sign up for the “fuel-up” option, the factory will take care of the electricity the car needs. You will just pay the company 3 or 4 cents per mile depending on your driving mode.”
Cheryl said, “I don’t understand how they do this, but if you sign up for this option, the electricity you use for charging will not show up on your power bill. And I really don’t know how they do this, but, if you plug your car in to charge at a friend’s house, at work, or at your mother’s house in Maine, they will not be charged either.”
“For you it’s simple. Every month the car’s computer will tell the factory how many miles you drove in eco-mode and how many were in non-eco-mode and the charge will appear on your credit card based on the fixed 3 or 4 cents per mile. Charlie was about to take the “fuel-up” option when Cheryl said, “AND if you choose this option, the factory will lower the car price by $1,000.”
To make a long story short, Charlie bought the car, and got the sunroof and the premium sound system.
There is a long list of reasons to like this business model. There is also an equally long list of regulatory policies needed for this business model to become a reality. The benefits include:
- Potential to dramatically accelerate the penetration of electric vehicles;
- Ensuring that charging will be smart;
- Auto manufacturers become powerful allies to get the market reforms needed to reveal the full range of services that distributed resources can provide. They also become powerful allies in securing smart pricing at the retail level;
- Delivering all of the smart technology (smart metering, location information, communication capability) under the hood of the electric vehicle;
- Giving customers a simple way to get the economic value of smart charging and grid services (via a discounted purchase price for the car);
- Creating good incentives for the car company to optimize car and battery design to provide both consumer and grid needs;
- Capitalizing on car company credibility to guarantee performance; and
- Creating the concept of a mobile electricity customer. This reform alone has far-reaching benefits we are just beginning to grasp.
This EV business model is not possible without significant regulatory action. A few of the key challenges are:
- Organized markets will require reforms to reveal the value of electric vehicles to the grid and to allow market participation by aggregators of this type.
- Where markets do not exist, other pricing reforms will be needed to reasonably value the services provided by the EV manufacturers from their vehicles.
- State regulators will need to design mechanisms to reveal the value to local distribution networks.
- Enabling the concept of a mobile customer will require a common set of business practices that allow for intercompany revenue settlements to extend to the retail level.
Next we will tell the story about the groundbreaking collaboration in your state that made this story a reality.