Arnold Kling  

The Economics of Electric Cars

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I have begun reading Startup Nation, a book about Israeli entrepreneurialism. Unfortunately, the first anecdote is about an attempt, requiring huge capital commitments and considerable government intervention, to create an infrastructure for electric cars. The idea is to build a set of charging stations that would be comparable to gas stations, where you can swap out a drained battery for a new battery in the time it would take to fill up a tank.

Here is how I think about the economics of this, comparing the gasoline car with the electric car.

First, assume that oil is going to be used to produce energy for either car (I will relax this assumption later). Then the two technologies are:

a) Refine the oil into gasoline, distribute the gasoline to filling stations, store it in gas tanks, and convert it to electricity as needed using automobile engines.

b) Convert oil into electricity at the oil refinery, distribute the electricity to charging stations using wires, and store the electricity in batteries.

The economic questions are:

1. How much more efficient is it to produce electricity using one big machine at the refinery rather than using many different engines (if the latter were efficient, then electric companies would use lots of little engines)?

2. Compare the loss of using gasoline to transport gasoline to filling stations with the loss of electricity of sending it long distance across power lines.

3. Compare the efficiency of storing gasoline in tanks with the efficiency of storing electricity in batteries.

I assume that (1) and (2) favor the electric car, at least with the best technology for transmission lines. However, I suspect that (3) strongly favors the gasoline engine. When you turn off the ignition in your car, you stop using gas. But when you stop using your electric car, the battery is still going to run down (unless they have invented a battery that differs from every battery I have ever used). Moroever, the materials to make a car's gas tank probably cost something on the order of $100, but the materials to make a battery for an electric car may cost thousands of dollars. My guess is that gas tanks have a longer useful life and are less toxic when left in a junkyard.

Next, suppose we drop the assumption that oil is the fuel source. Now, it may be possible to use a cheaper source to produce the electricity centrally. That could be an advantage for the electric car. But what is the cheaper energy source? Coal perhaps. Nuclear perhaps, although the price of nuclear energy is difficult to assess, given that much of the cost is driven by regulatory compliance, which in turn reflects fears, many of them legitimate, about safety. But maybe that coal or nuclear power could be used to produce liquid fuels that could power internal combustion engines, and maybe that would be more efficient than switching to electric cars.

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COMMENTS (21 to date)
AlbertN writes:

Another factor in favor of electric cars has to do with the fact that power plants must have enough capacity to handle the loads they will see at peak times. Since the plants can't be shut off at night even when demand is low, we currently waste a huge amount of energy production during the overnight period.

Charging cars overnight would have a very low marginal cost.


Chris Marino writes:

Arnold, this is quite misleading. The raw materials for electricity production and gas are nearly disjoint and the economics are very nearly decoupled. To posit otherwise ignores these overwhelming structural differences. "Now, it may be possible to use a cheaper source to produce the electricity centrally." is an understatement to say the very least!

It's all #3. And while you might get incremental efficiencies in transport and production, the potential for storage improvements (capacity, power/weight ratio, efficiency, convenience) are enormous. A legitimate substitute for storage 'improvements' are recharging stations.

Ryan Vann writes:

Are we just talking financial efficiency, or also including negative externalities? Either way, it would be interesting to see some numbers on all the questions raised.

Isegoria writes:

I assume you're discussing Shai Agassi's audacious plan to put electric cars on the road, which strikes me as an incredibly effective way to redirect public money into his own pockets, because the issue is too complex for most people to analyze competently.

Burning fuel in an automobile engine is indeed very, very inefficient: just 20 percent of the energy that goes into the gas tank goes toward moving the car. An electric motor is much more efficient — 90 percent — but its batteries and charger may only be 50 percent efficient.

(Very little energy is lost at an enormous power plant. More is lost along transmission lines.)

The glaring issue right now is that batteries are extremely expensive and heavy per mile of range, so a battery-powered long-haul truck is out of the question, but a battery-powered commuter car may be cheaper than its gasoline equivalent.

We probably don't want to produce electric cars for any and all uses of gasoline cars; we probably want to cherry-pick the best times and places to deploy them.

Another approach is just to look at the relative cost (on a per-BTU basis) of electricity at the meter and gas at the pump.

Here in the midwest, gasoline costs about $22 per million BTU, and electricity costs about $32 per million BTU right now.

However, a battery operated car can convert over 75% of the power from the meter into forward motion under normal usage, while a typical auto engine is only about 20% efficient under normal conditions.

So an electric car has a substantial cost advantage over gasoline.

Part of this is because gasoline is a highly refined product, and one of the most expensive fuels on a per-BTU basis. No power plant would ever burn gasoline--it would be insanely expensive. Coal, natural gas, even biomass are all less expensive.

The Cupboard Is Bare writes:

Would the owner of a new vehicle be willing to swap his/her brand new battery for one that might be in borderline condition?

David C writes:

Re: The Cupboard Is Bare

Presumably, if the battery fails, the charging station would have to pay the cost of sending and installing a replacement battery to the owner wherever they may be. This would give charging stations a strong incentive to not install batteries in poor condition. A customer forced to wait around for 3 hours for a battery replacement is not going to buy from that charging station again.

I think the value of the system may depend on what type of electric cars are being considered. Since presumably Israeli roads aren't as well designed as industrialized countries, a small vehicle with a top speed of only 60 mph may be the best option. When the size of the engine is reduced, electric vehicles become a better option. That they are expected to compete with the horsepower of gas vehicles is the main hindrance to electric vehicles in the US.

Jerry C. White writes:

Get on Yahoo Finance and get any Seeking Alpha blog. Then click on John Petersen in the authors section. If you read all of his articles, along with the accompanying blogs, you will have the equivalent of a PhD in electrical vehicles and alternative battery storage. This will take several hours, but it is well worth the effort

Les writes:

This discussion is a wonderful reminder of "the fatal conceit" where central planners falsely believe that they have the information required to run the economy.

wm13 writes:

"the potential for storage improvements (capacity, power/weight ratio, efficiency, convenience) are enormous"

The potential is enormous, but there is most assuredly no guaranty that said potential will be realized. Basic battery technology is over a century old, and the basic fact is that, despite powerful incentives and much research, it hasn't gotten much better. Maybe it never will. Or maybe the next Edwin Land is even now in a grad school laboratory somewhere, playing with ions in some way that his advisor thinks is a waste of time. For sure, no central planner knows.

spencer writes:

Next, assume that oil will be priced at $300/ barrel and see how the economics works.

All your comparisons are based on oil being well under the current $75 price.

Of course I have no more idea than you do of what the price of oil will be in ten years, but $300 oil seems one realistic scenario worth preparing for.

Yancey Ward writes:

It is probably more likely that we will discover a more efficient process for producing energy dense liquid fuels using electicity than significantly better battery powered cars.

Now, a way of delivering the electricity to the auto while it is moving might eventually be a path forward.

Kevin writes:

Lots of incorrect comments here.

"...we currently waste a huge amount of energy production during the overnight period." Electricity is not wasted at night. Generation matches load at all times.

"Very little energy is lost at an enormous power plant. More is lost along transmission lines" No. The most efficient generators are about 50% efficient. Transmission losses are generally less than 10% on A/C lines (almost all the grid).

"No power plant would ever burn gasoline..." Lots of power plants burn diesel, but most are usually idle except during hot days in the summer and very cold days in the winter.

@ Les, no kidding.

simone writes:

The problem of comparing gas and electric is the use of average performance. Gas performs close to it average across temperature spans while electric varies immensely. Gas wins by a mile when operating condition vary.

Colin K writes:

What I don't understand is why there's so much hype about electric cars and so little about second-gen biofuels like what LS9 and many others are working on. Algae biodiesel in particular hits the trifecta--100% carbon neutral, industrially scalable, and largely compatible with the existing fleet and distribution system for diesel.

Floccina writes:

Batteries, capacitors and fuel cells are still way to expensive (there is hope though see Firefly Energy). People are still better off looking to make ICE vehicle more efficient and make smaller vehicle safer through electronics and areas that follows Moore's law.

Floccina writes:

spencer even at $10 per gallon there are better options than batteries (look at the BMW c1 200 and Piaggio MP3 hybrid). Batteries are an all or nothing at all option. If the price of fuel is 4x high you do not need to eliminate its use completely, rather you might want to cut consumption by 75%. There are many ways to help achieve this e.g.

Drive less
If you drive alone use motorcycle or scooter
Car pool
Smaller lighter vehicles
Diesel hybrids
Rail over trucking for goods
Home delivery over shopping
Intelligent cars that can communicate and so allow close drafting at highway speeds
Plug-in hybrids

BTW CTL and GTL can produce diesel for less than $300/barrel equivalent.

There is reason to hope for cheaper batteries but batteries are still way too expensive per mile at this time at $10/gallon they will be closer but IMO still more expensive.

Isegoria writes:

"Very little energy is lost at an enormous power plant. More is lost along transmission lines."

Let me rephrase: Very little energy is lost at an enormous power plant compared to a small power plant, like an automobile engine, but additional energy is lost along transmission lines.

DanT writes:

IEEE Spectrum had a cover article a few years ago on electric cars. Their economic evaluation compared a theoretical all-petrol infrastructure to a theoretical all-electric infrastructure. Price per mile of petrol was less than electric.

The key drivers are battery technology (especially useful life) and cost of petrol. Petrol powered cars can't become much more efficient (in theory), but batteries have much room for improvement.

A major challenge is transitioning from petrol to electric. High up-front infrastructure costs must be billed back somehow. Improvements of 30% are generally needed to justify such a major infrastructure transition.

From what I have seen, the battery technology hasn't made enough progress to warrant the transition. Which is a bummer since I seriously want an affordable electric car.

Zoran Lazarevic writes:

Electric charging stations can use wind and solar which are otherwise uneconomical because of their unstable output. Batteries can be charged with unstable voltage, when there are gusts of wind and when there is sunlight.

Dan Weber writes:

But when you stop using your electric car, the battery is still going to run down (unless they have invented a battery that differs from every battery I have ever used).

There are such batteries. Go to and learn about the different types. There are all sorts of trade-offs you can make.

But the discharge rate isn't really a problem for electric cars. You take them home and plug them in. The problem is how much range you can store.

Would the owner of a new vehicle be willing to swap his/her brand new battery for one that might be in borderline condition?

The way to get battery swaps to work is that people own their cars but lease the batteries. Just like you send the DVD back to Netflix and they send you a new one, if they give you a battery in substandard condition you give it back and get a better one.

I think battery swap can only work with leased batteries. You aren't going to let someone swap a $10,000 piece of machinery for you on a weekly basis.

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