Resolution: Self paying vehicle loans/notes

The current plan of record (subsidies) is impractical
The EPA estimates that complete turnover of the vehicle fleet in the US requires 30 years. Turnover will take substantially longer than 30 years if adoption rates are not 100%, and subsidies will make only a negligible contribution to achieving such rates. The current federal program of subsidies through consumer tax credits is between $2000 and $3000, and GM is calculating that the battery alone in it's compact Volt PHEV will add $10,000 to the price of the car. Clearly, such a token federal subsidy has no impact on the substantial barrier to entry that the Li-Ion batteries pose. More aggressive subsidy proposals, such as in House bill HR5351 of 2008 or Obama's $7000 subsidy do not cover much more than half the battery cost, but more importantly are limitted to the first million PHEVs. This covers less than half of a percent of the US vehicle fleet. Secondly, because the program is not revenue neutral, there will be a substantial tax burden needed to sustain such a program over the time required to transition our fleet of gasoline vehicles to PHEVs. Thirdly, because the required capital comes out of the general budget, the program is sensitive to the shifting focus of Congress, and it is highly unlikely that the program will continue to be funded for the required 30 plus years. Lastly, because the subsidy is not neutral to the class of car, it favors voters owning Priuses over voters driving pickup trucks, undermining prospects of long term bipartisan support.

In contrast, this program:
 * 1) covers 100% of the cost of additional PHEV technology
 * 2) Is revenue neutral- removing incentive for congress to shift money away from it.
 * 3) Money flow remains in the private sector, removing the ability of legislative branch to divert or shut off flow in favor of other governmental projects.
 * 4) The program does not favor any particular class of car.  Heavier vehicles will require larger batteries, but because they proportionately require more electricity, these owners will pay the cost of their battery at the same rate as vehicles in lighter weight or performance classes.

PHEV sticker shock
Summary: A market failure is created by the barrier of a high initial capital outlay required for electric vehicles which are more cost efficient than gas versions over the vehicle lifetime. Consumers are unable to linearize the capital cost into a sequence of payments due in part to the tightening of credit markets.

Plug in Hybrid Electric Vehicles (PHEVs) are expensive for one primary reason: Automotive grade Lithium Ion batteries are expensive, costing from 1 to 2 dollars per Watt of actual capacity (raw cost of batteries often is 1 dollar per watt but to achieve a 10 year lifetime, the batteries are generally not allowed to drop below 50 percent discharge (Depth of Discharge "DOD") . So actual cost can get as high as $2 per delivered watt of capacity.) Currently the only highway speed Plug in electric vehicles that are available in the US require an after market conversions. For extremely light cars such as the Prius, Hymotion charges just over $10,000. Heavier vehicles such as the Ford Escape cost $32,000 to $36,000. General Motors believes that that factory built PHEVs such as its Chevrolet Volt will reduce this added cost significantly. However, the premium for PHEV will still be significant- GM currently estimates that the Volt will retail for $40,000- at least $16K more than comparable gasoline powered vehicles.

Capital now flowing into Gasoline purchase is substantial
Capital is available for financing loans due to energy cost savings compared to current high gasoline prices. According to Hawaii state department of taxation, 480 million gallons of gasoline was sold in the state in 2007 (Boats excluded, along with other types such as diesel and aviation) At $4 per gallon, in the next year this will represent 1.9 billion dollars, nearly all of which will leave the state.

Comparison of Cost of gasoline versus electricity over life of vehicle
Summary: Plug in electric vehicles, despite the substantially higher capital cost now have a lower cost of ownership when compared to gasoline vehicles.

Sierra research calculates that passenger vehicles have an average vehicle lifetime of 155,000 miles. The National MPG average for new passenger and light trucks for 2004 was 24.6 mpg. If the price of gas remains constant at an average $4.30 over the 155,000 mile lifetime of the vehicle, then the owner will spend $27,093 for 6300 gallons of gasoline in 2008 dollars. Assuming that gasoline prices are held to the current consumer price index of 5.6% per year, the owner(s) of the vehicle will pay $35,047.60 for gasoline over its lifetime.

Assuming alternative energy is priced at 24 cents per kilowatt hour, then the owner saves $11,971 by using electricity if gas prices do not continue to go up, or $15,486.15 if gas and electricity prices go up by 5.6%. This money can be used to defray the higher cost of the plug in hybrid.

The estimation of the energy cost for PHEV equivalent vehicles follows. The advanced vehicle testing group of the DOE provides figures on electricity used by commercially available PHEVs running in all electric mode. According to PHEV experts, 1 gallon of gasoline is equivalent to 10 KWHs of electricity from the grid, regardless of size of PHEV vehicle. EG: if a gas version of a vehicle gets 14 MPG, then it would get one tenth of that per kilowatt hour (1.4 miles per KWH). .

Using this conversion factor, 6300 gallons of gasoline is equivalent to 63,000 KW hours, which priced at a 24 cents per kwh is $15,122, or $19,561 assuming green electricity prices rise at 5.6% per year. Compared to the corresponding cost of gasoline, this saves $11K assuming no future rise in gasoline prices, and $15K if gas rises keep pace with inflation.

Example surcharge implementation
Summary: an example program is given to illustrate the key points of the approach of surcharging electricity to cover high initial capital outlay for energy storage in the vehicle. The example is tailored for Hawaii since it is a local proposal with particular tradeoff choices made on price points, recovery rates, and favored vehicle classes. A program at a federal level might make very different tradeoffs, but the principle of payback is the same.

This resolution is not perscriptive regarding specifics on the size of the surcharge price, it's rationale, or the allocation of surcharge for green energy guaranteed price versus battery loan repayment. However, in order to show that specific implementations are practical, several examples for Hawaii and national programs are given on this site. The following example for Hawaii is intended to illustrate the mechanics and tradeoffs in the proposal. It was selected only for illustration purposes. Policy experts and legislators may well decide in favor of a different set of tradeoffs.

Example: The following implementation assumes that Hawaii uses the national average of 1.68 gallons per day per vehicle   Assuming recharge at work, and the battery may not go below 50% charge, then 16.8 KWHs of energy is needed for the vehicle per day, including loss of energy due to recharging inefficiency. The actual battery size required allowing for 85% charging efficiency would be 14.25KWHs. Current prices per watt-hour of capacity is $1 per watt, and we will assume the responsible regulatory entity sets a price lower than this so that industry has a motive to push battery manufacturing efficiency. Assuming the refund rate is 82 cents per watt hour of battery of capacity, the amount payed to the car dealer is $11,691.

By the time this scheme is implemented, for the vehicle customer, instead of paying $5.20 per gallon of gas (in Los Angeles it is already $5.00/gal as of July 2008), the PHEV customer pays for electricity for the vehicle at an equivalent of $3.95 per gallon of gas. This discount tracks the price of gasoline, so that if gasoline increases to $5.72 per gallon (10% increase), then the PHEV customer pays $4.35 per "gallon" (10% increase). In the first year, most of the money in the surcharge goes to the renewable energy ($2,082 paid at 34 cents per KWH for 6122 KWs of power) and only $336 goes to repaying the cost of the battery. In the second year, the accumulated repayment is $915. By the 10th year, $17,726 has been recovered.

At a loan rate of 9%, the total loan repayment would be $17739.50. The loan is low risk since repayment mechanism is through utility bill payment (no pay, no lights in the home), and is backed by the government. Banks see 51.7% interest as a percentage of principle, so the return is sufficiently attractive. (Amortization calculators are common on the net (eg. here). Using 11691 as principle, daily payments of 365 per year for ten years- 3650 payments at 9% interest rate yields the above caluclated cost of capital.)

Variations While the particular example above assumes a pessimistic view of future oil prices, the approach does not rely on the hope that egregious future gas prices will allow repayment will occur at the end of the period. In the example, the incentive of 34 cents per KWH is very high, and is intended to show that such price floors are possible, concievably needed to defray the risk and cost for related infrastructure such as grid storage and new HVDC lines. Since Solar thermal and wind have been bid out at 12 cents per KWH already, there is a case to be made that 19 cents per KWH is a sufficient price floor to guarantee a ROI that is reasonable for investors. The customer would pay off the battery in the same period in a scenario where gas prices crawl at a modest 4%. 10 years from today the plan assumes the customer would be paying $5.62 per equivalent gallon of gasoline- a price that would be a bargain in the UK today.

Calculation of minimum range required for Hawaii
In 2007, Oahu had 722,486 registered vehicles Approximately 696,000 of these were gasoline vehicles and consumed 299 million gallons of gasoline. Dividing this among the number of cars, the per day consumption by the average vehicle is 1.11 gallons of gas. To generate the average miles traveled, we combine the average MPG for passenger cars with the average MPG for "trucks" (including pickups, and vans) in the proportions found in Hawaii. In 2007, 76.7% of vehicles in Hawaii were passenger vehicles With the average vehicle using 1.11 gallons, this means that the average Oahu vehicle travels 25 miles per day. This is a lower bounds figure, since daily driver commuter vehicles would account for higher than average miles, and would accumulate such mileage on workdays. Big Island vehicles accumulates on average the most miles per vehicle with 169K gas vehicles consuming 75 million gallons per year (average miles 28 per vehicle).

Consumers requiring greater range might still choose the PHEV because they have two options: 1) plug in at work, or 2) burn gasoline when when electric range is exceeded.

Example calculation of battery required for Compact weight class
The calculation given in the example implementation uses the national average gallons per vehicle, which is higher than that of Hawaii. The PHEV announced for 2010 by GM, and rumored from Toyota are in the compact weight class, so it is reasonable to assume near term take up will be in this class. This calculation follows. Compacts of the size of the Prius and Renault Kangaroo achieve efficiencies of .268KWH per mile, so the required electricity required from the grid for an Oahu 22 mile range is 6.26 KWHs. Charging is only 80% efficient, and so the battery electricity used is 5KWHs. To achieve 10 year lifespans, battery management forces vehicles into non electric mode when the battery is 50% depleted, so the required battery capacity would be 10KWHs, adding a $6300 cost assuming GM's aggressive 63 cents per WH of capacity, or $8200 for the example program's 82 cents per WH.

Other weight classes: The rate of cost recovery is the same regardless of weight class so long as the battery capacity is not too high to be fully utilized (customer fails to pay for a full recharge every day).

Calculation for mature PHEV market
As calculated earlier, the average Oahu car uses 1.17 gallons of gas. Using the conversion rate of 10KWHs of grid power required to deliver the equivalent energy as 1 gallon of gas, this means 11.7 KWHs are needed from the grid, of which 9.4KWHs gets to the battery. As previously mentioned, a battery with a capacity double this figure is needed to insure decade long battery life. Assuming current day battery technology, in a mature PHEV market where all weight classes have PHEV versions, the average battery capacity would be 18.8KWhs.

Capital needed
59,861 new cars were sold in 2007. Using the 63 cents per watt-hour allowance, and assuming 20% of sales were compact PHEVs, the capital needed to offset the new car battery cost would be $75.2 million. As purchases of PHEV vehicles nears the mix of weight classes typical today, the energy usage for the bulk of vehicles will be a kwh equivalent of Oahu's 1.17 gallon per day consumption. Converting the gallons used to equivalent KWHs, then the average battery size would be 19 KWHs, and the capital required for the batteries would grow to $143 to $186 million per year (63 vs 82 cents allowance per WH of capcity).

New Oahu power generation needed
Summary: When 70% of current gasoline consumption is displaced by electricity, Oahu's HECO will sell an additional 2 terawatt hours of power per year at the premium "Green Electricity" rate. (At 34 cents per kwh, this would represent $680 million in new electricity revenue). Early years will make insignificant contributions to new electricity sales.

Assuming 20% of sales were PHEV compacts, then the Oahu added demand assuming 80% recharging efficiency would be 52 MWHs per day (only 19GWhs per year bringing in $6.5 million at 34 cents per kwh). This modest start would represent a miniscule .2% of Heco's annual generation, but as the program takes hold and PHEVs become the dominant vehicle sold, then new electricity revenue growth will contribute more significantly to the balance sheet. When a substantial portion of the daily driver fleet has been switched over to PHEVs, assuming that 70% of current gasoline use has been displaced, then 209 million gallons of gasoline on Oahu would need to be replaced by electrical generation, at 10KWHs per gallon, or 2 terawatt hours per year, increasing Heco's generation needs by 25%.

If the goal were highest utilization of existing plant, then this scheme would be attractive since recharging would fill the dip in demand at night. However, Hawaiian source energy is specified, so new capacity will be need to be built. This will force diversification of energy generation infrastructure to sources independent of commodity price swings, and the widely expected cap and trade future cost pressure on fossil based electrical generation. Assuming capacity were added in very short time frames, then a 10 MW solar farm using 2 axis arrays would have to be constructed to deliver the necessary 1440 MWs in the lowest energy month.

Alternative energy break even
Utilities are in business to make money, and from a business perspective, alternative energy sources appear to be too risky and unreliable to warrant the risk of making utility scale inventstments. They need to see a reliable and stable source of revenue. Acquiring necessary permits for wind and geothermal can require several years, and supplies for some types (wind turbines) is currently backlogged. Certain types such as PV (photo voltaic) solar can be added incrementally and with extremely rapid schedules. Nellis Air Force Base began work on its 16MW solar array on April 23, 2007. It went on line in January, 2008. According to Solarbuzz.com, the break even point for industrial scale PV is 21.32 cents as of July 2008 (including a complex set of variables including cost of capital, 5.5 hours of sunshine hours per day {typical for Hawaii}, cost of installation, maintenance factors itemized on their site). This price can be driven lower. Along with incentives and volume purchasing, the cost per kwh can be pushed to 10 - 12 cents per kwh. 

Spreadsheet
This spreadsheet may also be viewed here at Google Docs. You may download it for use in Excel or may copy it to your own spreadsheet on Google (click "edit if you have permissions in the lower right corner. Select menu item File.Export..xls).  The sheet that is visible concerns calculation of the battery size and electricity required.  Note that there are three additional sheets (click tabs at bottom) with illustrations of payback schedules for plans with differing parameters.
 * Savings vs equiv KWhs: This plan calculates uses the eqivalent kwhs per gallon of gas to calculate the price of electricity as if it were priced like gasoline.  So for example since 1 gallon equals 10 KW hours of power, then if a gallon costs $4, then the surcharged rate customers pay is 40 cents per KWH.  The plan can pay back commuter car batteries (driver recharges at work), if we assume gas goes up on average at 4% per year, and if the cost of green electricity is set at 24 cents per kwh.
 * Savings vs average car This plan assumes very high Green energy subsidies (34 cents per KWH), and a full battery capable of travelling the average daily Hawaii vehicle mileage without requiring a recharge at work. Under this plan the customer is charged for electricity paying the same rate as they would if driving an average MPG gas vehicle.  "Average" means average MPG which was 21.37 for gasoline passenger cars on road as of 2007 according to federal government.   (At $4 per gallon, the surcharge rate works out to 70 cents per KWH.)  This is high, but some socially conscious early adopters might be willing to help kickstart the process by agreeing to the rate under the following  proposition: "Had you gone on driving the car you were in the past, on average you would have spent $4.65 per day if you were driving an average car on Hawaiian roads and paying $3.95/gal."
 * Savings vs gas version same car: Under this plan the customer is charged for electricity paying the same rate as they would if driving a gas version of the same model vehicle. An example is given for a vehicle using actual government testing figures.  No data yet is published for a PHEV Prius, but using unofficial figures from EAA-PHEV, they would be similar to the figures on this spreadsheet.  All gas mode means MPG there is strictly no use of the electrical motor (not even regenerative braking).  This repayment works if we assume a commuter size battery, and a below inflation rate of gas prices (2% per year).

All repayment schedules assume daily repayments at 9%. pXX8lhvgWG0lBP9XM9NDGIA