Paving the way for the rise of the electric vehicle
As car manufacturers develop their electric vehicles (EVs) and Tesla is stacking up orders for its latest Model 3, the electricity industry landscape is changing to prepare for EVs becoming more mainstream, says leading HEC Paris professor Andrea Masini. So much so, that the whole electricity generation and distribution industry will have to adapt and cope with an increasingly complex, digitized and customer-centric world. In parallel, Tesla’s competitors are adapting their business models and in some cases teaming up to set up a standard so that recharging stations could charge a wide range of electric cars, says the academic.
The Kia Soul, Volkswagen E-Golf, Chevrolet Spark EV, Nissan LEAF – these are just some of the fully electric cars available today in a market that’s driving in the fast lane. Already one in seven BMWs purchased in the United States are fully electric, with Apple and Dyson rumored to be designing their own EVs. Meanwhile pioneer Tesla has its sights set on dominating, even defining the market. The California-based electric car manufacturer claims to have received over 400,000 orders for its latest Model 3; it is also developing a worldwide network of charging stations and has begun building its one kilometer-long Gigafactory, a vast $5bn battery-producing plant in the Nevada desert.
So how are other car manufacturers trying to keep up with Tesla’s gargantuan plans in line with customer demands? Certainly prospective customers for electric cars have high expectations. Most drivers want a good low-cost car, with all the right features, but with a good charging infrastructure. Yet some still fear their EV could run out of power at the wrong moment and leave them stranded. “This range anxiety is psychological,” says HEC Paris professor Andrea Masini, who researches the operational and organizational impacts of technological innovations. Based on his research, he argues that, when we use our car, most daily journeys fall well within the range of its battery life. “If you take a Nissan Leaf, the autonomy is about 150 kilometers and many users think there is no point buying a car with such limited range,” says Masini, who is also the management school’s MBA Associate Dean. “However in the Paris region, the average customer drives no more than 50km per day, so you could very easily drive an e-car, charge it at home at night, and not have to worry. Currently it takes up to eight hours to fully charge the EV at home but it can take significantly less time in dedicated fast-charging stations.”
Range anxiety is gradually dissipating, but for many consumers a question mark still hangs over how to cover greater distances in an EV. To address this, some car manufacturers are attempting to allay their customers’ fears about longer journeys by selling them a mobility solution. During key weeks in the year (typically summer) when their EV customers want to drive longer distances to reach holiday destinations, companies like BMW are therefore offering to supply them with a regular gas-powered vehicle, explains Masini.
Another incentive for EV customers is the knowledge that they could make money from owning their carbon-free cars and therefore reduce the overall cost of running an EV. Today, when looking to buy a car, many consumers look at the total cost of the investment over five to ten years and manufacturers are trying to bring down the cost of ownership. One way of achieving this is for EV owners to resell electricity back to the grid. Customers often charge their car at night when electricity is cheaper. If vehicles were equipped with bidirectional vehicle-to-grid capabilities, customers could resell this energy back into the grid during the day when tariffs are higher, thereby reducing overall cost of ownership.
On the manufacturing side, the main way to cut the price of an e-car is by investing heavily in batteries, and many EV manufacturers are going down that road as batteries represent the largest cost when making an EV. Both Renault and Nissan, for instance, had plans to invest massively in battery plants, says Masini, although discoveries and developments in this technology are not entirely in the hands of the car manufacturers “because we are talking about chemistry,” says the professor.Tesla has pushed battery range through its own research and further mitigates its customers’ range anxiety with ongoing plans to develop a network of supercharging stations so big that customers will never have to worry about long distance journeys by car. This in turn has led its competitors to discussing the possibility of pooling together to create electric car charging standards that are open to all other manufacturers. “If manufacturers believe their car is superior, they may have an interest in opening up the standard [to extend charging options] because they know that users will buy their vehicles anyway,” says Masini.
Empowered consumers leading to a changing electricity industry
As the world prepares for the inevitable mass market usage of electric cars, the very nature of the electricity industry is also changing, says Masini, and this will affect the EV landscape. Traditionally a national grid is a centralized model where there are a few generation points. Within this system, the electricity is distributed through a very dense network with a lot of demand points and not much intelligence is required on the part of the consumers. However today, with what is becoming a new model, consumers have more control. “Many consumers are saying: ‘why should I buy electricity produced from a plant in Normandy or Brittany, when I can install solar panels on my roof, produce my own energy and become self-sufficient?’,” explains Masini. Electricity companies are therefore obliged to listen to customers more than perhaps they used to, as with the old model the customer was far away and obliged to buy the big producing firm’s electricity. “Now they realize that their customer is probably the most precious asset they have, because they can all of a sudden become independent producers using photovoltaic cells (PV),” says professor Masini. What these customers still need, however, is a service that helps them decrease energy consumption.
A typical scenario in the not-too-distant future could therefore see an energy market made up of a few small suppliers, with customers generating their own electricity. At the same time, if EVs were equipped with bidirectional vehicle-to-grid capabilities, each vehicle could be used as a mobile electricity storage device. Vehicle owners could sell back electricity in excess to the grid when they do not need their cars.
However, all these transactions when spread across an entire nation, require a substantial exchange of information. That’s where IT companies like Google might come in. When it comes to monitoring and overseeing all these operations, software and IT companies will increasingly come in handy because precise information is required about the mobility needs of the vehicle owner and the electricity demand of a building. “Perhaps they will help users optimize their consumption, dependent on how electricity prices fluctuate over time and based on the capacity of the market at that particular point in time,” says Masini. Consumers will also need to know where those electric vehicles are and at what time they will become available to feed back electricity to the grid. “All that requires intelligence, a lot of intelligence,” he adds.
While software companies are currently looking at how they can enter these markets, we also see a lot of newer and smaller players trying to disrupt the electricity business, says Masini. “Apple has plans to become an electricity retailer and sell excess energy from their solar panels. At the same time, you see giant operators like E-On being attacked by the small IT firms and prosumers, which are seen as small mosquitoes stinging them,” he says. This disruption has led to a lot of giant companies separating the generation assets from the distribution business, as they see the value coming from interaction with the customer.
As for Tesla and whether it will dominate the market, this remains to be seen. By selling high-end environmentally-friendly cars that are fun to drive and subsequently using revenues to fund further models, battery development and charging solutions, Tesla has come up with a business model that seems to work. Like aircraft manufacturers, Tesla sells its cars through orders: once it secures a sufficiently large enough number of customers to justify the investment and allow it to bring costs down, only then does it start manufacturing. “This is a risk, but if the numbers are there and the product performs well, then it could work,” says Masini. We are currently in the midst of a nascent industry and with that comes uncertainty about what will come next; there are more and more players competing. “At some point there will be consolidation as we saw in the PV industry a few years ago, but this is certainly a very interesting point in time,” adds the professor.What is certain is that the totally-electric car industry is advancing fast and as it becomes the norm to charge up our EVs as effortlessly as we fill the tank with gas, we will certainly face a different electricity industry landscape to the one we know today.