The coming wave of battery-powered vehicles is good news -- a step toward addressing concerns about climate change and oil dependence. But electric vehicles also present new challenges for electricity providers, utility companies, smart grid and charging startups and traditional oil companies.
Converging factors, such as radical cost reductions in lithium-ion batteries, are pushing us toward an "electrification tipping point" when electric vehicles will become economically viable for the masses. By 2020 electric vehicles and plug-in hybrids could account for nearly 10 per cent of new vehicle sales globally. By 2030 this figure could accelerate to about 30 per cent, with an additional 20 per cent of hybrid vehicles using batteries.
The market is still young, but automakers are committing to electric vehicle technology. Several electric vehicles will be introduced in the coming year, including Nissan's Leaf and the Chevy Volt.
Electric-powered vehicles will create significant growth across the entire transportation value chain, expected to reach nearly $300 billion by 2020, according to global management consultant firm PRTM (my employer). This rapidly growing market will drive a shift in revenue pools from natural resources like oil toward high-tech components like the battery.
For utility companies this trend offers new revenue opportunities, since each electric vehicle consumes the same amount of electricity as an average household. The proliferation of battery-powered vehicles will require the upgrade of the electric grid. Many utilities are preparing for this shift and working to avoid expensive capital upgrades by adopting new smart grid technologies. Utilities are also employing new customer strategies, like offering discounts to encourage charging during off-peak hours. As we look ahead, electric vehicles will likely become the smartest "appliances" to connect to the grid; as such, they will be a catalyst for many smart grid solutions.
While utilities can embrace these market changes in exciting new ways, they still face substantial challenges in the move toward electrification. For example, installation of the vehicle charging infrastructure, including the IT backbone to provide services and address cross-state roaming, will require an investment of about $2,000 per vehicle, or more than $30 billion in the U.S. and Europe by 2020.
While new smart grid technologies can reduce the effect, they will not eliminate it. There will probably be constraints to local grid capacity, particularly with the increase in fast charging technology, which will require upgrade investments. The current regulatory environment does not provide incentives for utilities to make the necessary large-scale investments. Depending on regulatory developments, many utilities may pursue partnership opportunities with private companies.
The market evolution will impact every aspect of a utility's business, requiring innovative changes to its operational practices and service offerings. Some consumers will demand a "clean energy" option to guarantee low carbon power. Utilities will also need to develop new pricing policies to incentivize off-peak charging. Solutions will come in many forms. They may be as simple as finding ways to accelerate the installation speed for new home charging equipment.
The opportunity for new revenue streams is also attracting entrepreneurs and venture capitalists who want to capitalize on the build out of the electrification infrastructure and shape the industry through innovative business models. A prominent example is the start-up Better Place, which has attracted more than $400 million in funding to develop its novel concepts around battery charging and swapping.
Smart grid technology and software companies such as Silver Springs Networks are also receiving substantive investment. Many of these players are seeking strategic partnerships with other value chain companies to position themselves as the technology of choice. The recent partnership under which Ford Motor will integrate its electric vehicles with Microsoft's Hohm software, which monitors utility consumption in homes and makes recommendations on what users can do to save energy, exemplifies this trend.
Traditional oil companies are not sitting idle. If, as expected, 30 per cent of vehicles are electric or plug-in hybrids by 2030, approximately 1 million fewer barrels of oil per day will be consumed in the U.S. With this threat looming, many oil companies are starting to embrace electric vehicles and seek adjacent business opportunities.
Exxon Mobil, for one, has developed a new battery film technology to enhance the power and reliability of lithium-ion batteries, which it expects to be available in 2011. With the rapid development of fast-charging technology, the concept of "electric gas stations" is only logical. As a result, oil companies are exploring how to leverage their franchise gas station networks to include fast-charging capabilities.
The disruptive and dynamic nature of the emerging electric vehicle value chain makes it difficult to predict which players and business models will emerge as winners. But it's clear that both old and new companies will pursue significant business innovation in the coming years. The winners will be those who begin building the foundation today.
Oliver Hazimeh is director and head of the global e-Mobility practice at PRTM, a global management consulting firm. He can be reached at ohazimeh@prtm.com.
