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

Electrical Vehicles: 100 hundred years of Failure 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. East German electric vans of the Deutsche Post, 1953. Thomas Edison and an electric car in 1913. Buket AVCI

Electrical Vehicles…. Buket AVCI The Nissan Leaf The Henney Kilowatt, a 1961 production electric car based on the Renault Dauphine The Nissan Leaf GM EV1 Tesla Roadster Buket AVCI

Better Place v/s Conventional Electric Vehicles 1) Cost of Ownership BP does not sell batteries to customers, instead charges per mile usage. EV Car + Battery Battery Cost (c) K Electricity @ ce/mi Total Cost of Usage Initial Purchase Years 1 to T EV Car K I may remove this slide. Better Place @ p/mi Total Cost of Usage Initial Purchase Years 1 to T 2) Range Anxiety BP installs a network of battery switching stations. Buket AVCI

The Business Model Battery Customer Switching Station Electricity Leased by BP Limited Range Cost Payment Plan Per-mile price Subscription fee Inventory of batteries Service Level Charging Spots Electricity Paid by BP Home or Work Buket AVCI

Can Better Place succeed where Conventional Electric Vehicles fail? Research Questions How should Better Place decide on pricing and stocking quantities at switching stations given the current business model? How do the advances in battery technology affect environment and optimal adoption of Better Place? Can Better Place succeed where Conventional Electric Vehicles fail? Which one can achieve a higher adoption? Which one is environmentally better? Buket AVCI

Customer Behavior N potential customers Customer maximizes the expected utility based on the following utility and cost elements: Buket AVCI

Economics of Better Place 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) Firm’s decision variables: per-mile price (p), subscription fee (S) and number of batteries to stock (Q) Repairable Inventory System Customer Demand for Switching M/G/∞ queue -Average charging time τ -Electricity cost: ce per miles Number of customers Probability of going to station Buket AVCI

Economics of Better Place 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 Subscription Fee Profit from Miles Driven Battery Investment Stocking Cost Service level constraint Customer optimizes over miles driven Customer’s reservation utility is Ugas Buket AVCI

Literature Review 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) Buket AVCI

Model Solution Customer’s driving decision is set such that BP’s stocking quantity solves Per-mile price solves No benefit of stocking more batteries than required Cost of Electricity Cost of Battery Switching Service Buket AVCI

Results: Better Place Optimal customer adoption and optimal driving are strategic complements. implies 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. Buket AVCI

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

Economics of Conventional Electric Vehicles CE sells the customer an electric vehicle including a battery.  Fixed price contract Customer pays ce per mile. Firm’s decision variables: Fixed Price (F) Timeline 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 Profit per customer Customer optimizes over miles driven Customer’s reservation utility is Ugas Buket AVCI

Numerical Study - Parameters Technology-related parameters are obtained from Better Place website. Customer utility parameters are calibrated using daily driving data from EPA website. Parameter R τ c ce cgas r Value 100 miles 6 hours $ 13,500 ¢ 2.5 per mile ¢ 10.9 99% Buket AVCI

As battery price decreases Comparison of BP and CE As battery price decreases Adoption (A) Usage (e*) BP ↑ CE - 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 ! Buket AVCI

Conclusions 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 CO2 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. Buket AVCI