Tuesday, February 14, 2012

 AVCI Buket, GIROTRA Karan, NETESSINE Serguei,
Electric Vehicles with a Battery Switching Station: Adoption and Environmental Impact INSEAD Working Paper 2012/18/TOM

Widespread adoption of Electric Vehicles can limit the environmental impact of transportation and reduce oil dependence. However, limited range and high upfront battery costs have limited consumer adoption. A novel switching-station-based solution is extensively touted as a promising remedy that resolves range anxiety. Vehicles use standardized batteries that when depleted can be switched for fully charged batteries at switching stations. Further, instead of making an upfront battery purchase, motorists pay for miles driven. We develop a stylized analytical model that captures the key tradeoffs in the adoption of electric vehicles to assess the effectiveness of this remedy. Our model uses a classical repairable item inventory model to capture switching station operation; we combine it with a moral hazard construct from the contracting literature to capture customer adoption and usage. We find that electric vehicles with switching stations can indeed incent adoption and reduce oil dependence but, paradoxically, we also show that this increased adoption may not necessarily benefit the environment. A profit-maximizing operator increases adoption by limiting motorist range anxiety and the effective marginal costs of driving, which leads motorists to increase their driving, and hence increase electricity consumption. Depending on the source of electricity, this can be more harmful to the environment than the nonadoption of electric vehicles. Further, we show that switching-station electric-vehicle adoption and driving are strategic complements; thus, any policy intervention that increases adoption will also increase driving. Using real data, we calibrate the model and show numerically that with the current generation mix in the USA, switching-station electric vehicles would lead to reduced oil dependence and net environmental benefits, but in just 10 years electric vehicles with switching stations would be harmful to the environment. Further, well-intended policy interventions such as battery purchase subsidies, and seemingly helpful battery technology advances can actually be harmful to the environment.