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Buket AVCI (with Karan GIROTRA and Serguei NETESSINE) INSEAD Is Better Place Really Better?

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Presentation on theme: "Buket AVCI (with Karan GIROTRA and Serguei NETESSINE) INSEAD Is Better Place Really Better?"— Presentation transcript:

1 Buket AVCI (with Karan GIROTRA and Serguei NETESSINE) INSEAD Is Better Place Really Better?

2 INSEAD E LECTRICAL V EHICLES : 100 HUNDRED YEARS OF F AILURE Electric vehicle model by Ányos Jedlik, the inventor of an early type of electric motor (1828, Hungary). German electric car, 1904, with the chauffeur on top. Thomas Edison and an electric car in East German electric vans of the Deutsche Post, Buket AVCI 2

3 INSEAD E LECTRICAL V EHICLES …. The Henney Kilowatt, a 1961 production electric car based on the Renault DauphineHenney Kilowatt Renault Dauphine The Nissan Leaf GM EV1 Tesla Roadster 3 Buket AVCI

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5 INSEAD B ETTER P LACE V / S C ONVENTIONAL E LECTRIC V EHICLES Battery Cost (c) Battery Cost (c) Total Cost of Usage Years 1 to T c e /mi K K EV Car + Battery Better p/mi K K EV Car Total Cost of Usage Initial Purchase Years 1 to T 5 Buket AVCI 1) Cost of Ownership BP does not sell batteries to customers, instead charges per mile usage. 2) Range Anxiety BP installs a network of battery switching stations.

6 INSEAD T HE B USINESS M ODEL Electricity Customer Charging Spots Battery Leased by BP Limited Range Cost Inventory of batteries Service Level Payment Plan Per-mile price Subscription fee Paid by BP Home or Work Switching Station 6 Buket AVCI

7 INSEAD R ESEARCH Q UESTIONS 1. How should Better Place decide on pricing and stocking quantities at switching stations given the current business model? 2. How do the advances in battery technology affect environment and optimal adoption of Better Place? 3. Can Better Place succeed where Conventional Electric Vehicles fail? Which one can achieve a higher adoption? Which one is environmentally better? 7 Buket AVCI

8 INSEAD C USTOMER B EHAVIOR N potential customers 8 Buket AVCI Customer maximizes the expected utility based on the following utility and cost elements:

9 INSEAD E CONOMICS OF B ETTER P LACE Single Switching Station Stocks Q batteries at the station In stock probability r BP leases the battery Per-mile price contract (p) with subscription fee (S) Firms decision variables: per-mile price (p), subscription fee (S) and number of batteries to stock (Q) 9 Repairable Inventory System M/G/ queue -Average charging time τ -Electricity cost: c e per miles Customer Demand for Switching Buket AVCI Number of customers Probability of going to station

10 INSEAD E CONOMICS OF B ETTER P LACE Buket AVCI 10 Customer optimizes over miles driven Customers reservation utility is U gas Service level constraint Timeline Profit and Emissions are realized Customers decide to buy a BP or a gasoline car Adoption is realized BP offers per-mile price contract with subscription fee BP decides on the number of batteries to stock Driving is realized Profit from Miles Driven Stocking Cost Battery Investment Subscription Fee

11 INSEAD L ITERATURE R EVIEW 1) Repairable Item Inventory Planning Literature Sherbrooke (1968, 2004) Muckstadt (2005) 2) Principal Agent Literature Bolton and Dewatripont (2005) Van Mieghem (2000) Kim et al. (2007) 3) Green Operations Literature Chocteau et al. (2011) 11 Buket AVCI

12 INSEAD M ODEL S OLUTION Customers driving decision is set such that BPs stocking quantity solves Per-mile price solves Buket AVCI No benefit of stocking more batteries than required 12 Cost of Electricity Cost of Battery Switching Service

13 INSEAD R ESULTS : B ETTER P LACE Buket AVCI 13 Variable Price Adoption Driving Cost of battery Range Population Size Advances in battery technology increase the adoption of Better Place vehicles, but they will also increase driving! Adoption and driving increase with the population size due to the economies of scale in inventory. Optimal customer adoption and optimal driving are strategic complements. implies

14 INSEAD C ARBON E MISSIONS Total Expected Carbon Emission where and are per-mile emission from electric and gasoline vehicles. Adoption and Driving affect in opposite directions: Buket AVCI 14 Emission from Gasoline Vehicles Emission from Electric Vehicles vs. Are Better Place vehicles more effective than Conventional Electric vehicles in reducing emissions? ?

15 INSEAD E CONOMICS OF C ONVENTIONAL E LECTRIC V EHICLES CE sells the customer an electric vehicle including a battery. Fixed price contract Customer pays c e per mile. Firms decision variables: Fixed Price (F) 15 Buket AVCI Customers decide to buy a CE or a gasoline car CE Adoption is realized CE offers fixed price contract Driving is realized Profit and Emissions are realized Timeline Customer optimizes over miles driven Customers reservation utility is U gas Profit per customer

16 INSEAD N UMERICAL S TUDY - P ARAMETERS Technology-related parameters are obtained from Better Place website. Customer utility parameters are calibrated using daily driving data from EPA website. Buket AVCI Parameter Rτccece c gas r Value 100 miles 6 hours$ 13,500 ¢ 2.5 per mile ¢ 10.9 per mile 99% 16

17 INSEAD C OMPARISON OF BP AND CE Buket AVCI 17 Today the dual policy objectives of increasing electric vehicle adoption and reducing greenhouse gas emission are aligned. We expect that these two goals will not be aligned in the future, when battery costs go down as forecasted ! Adoption (A)Usage (e*) BP CE- As battery price decreases

18 INSEAD C ONCLUSIONS Buket AVCI 18 First stylized model on an Electric Car Model with Switching Stations. Assuming that the electricity comes from the same typical mix, Better Place will have more CO 2 emissions than Conventional Electric Vehicles in future even it achieves a higher adoption. Technological advances in battery cost and range may hurt the environment. Misguided policy actions will lead a misalignment in the dual objectives of increasing EV adoption and reducing carbon emissions.


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