Making Plug-In Hybrid Batteries Affordable

Plug-in Hybrid Electric Vehicles (PHEVs) are a key technology for achieving American energy security and reduced greenhouse gas emissions. The Bush administration, leading environmental groups, and congressional leaders in both parties are on the record supporting PHEV development.

Aggressive research, development, and demonstration (RD&D) is underway for these vehicles with both public and private funding. In order to make PHEVs more cost competitive, the innovative Plug-In Partners early adopters group is taking orders and additional tax and R&D incentives are included in U.S. energy bills currently on Capitol Hill. Yet the battery costs remain the biggest obstacle to the rapid introduction of PHEVs. Manufacturers are understandably cautious about selling vehicles with batteries that add several thousand dollars to the sale price and whose performance is uncertain.

Meanwhile, utilities are uniquely poised to benefit from the deployment of PHEVs, particularly if they incorporate emerging vehicle-to-grid (V2G) technology. PHEVs will not only add a new source of energy sales, but become a resource for grid management. Some utilities are also investigating the batteries' residual use for stationary grid applications.

To accelerate widespread introduction, a ratebase approach could be the answer to offsetting the added costs and risks of PHEV batteries. The core idea is that the utilities would own the batteries of PHEVs sold in their area and treat them as their own asset. They would lease the battery "free" to the car owner (offsetting the incremental battery cost to the car owner) and utilities would recover this added cost through utility rates.

Here's how it could work. When a PHEV is purchased, the battery is seamlessly sold to the local electric distribution utility. The battery would be the utility's property, but the customer would automatically lease the battery as long as they own the car. The battery lease would transfer with car ownership and cars that were retired would require the manufacturer to dispose of or recycle the battery just as today. The utility would recover the cost of batteries through a small surcharge on distribution rates.

This program would be in effect while PHEV sales are in their infancy and discontinue once sales reach commercial levels. If each battery costs about $3,600 and lasts for 12 years, the annual carrying cost for the utility would be about $475 per battery. If PHEV sales were to follow the trajectory of hybrid electric vehicle sales, there would be a 0.05% fleet penetration of about 130,000 vehicles (just over 0.1% of households with PHEVs) within the first six years of sales. At this point battery cost recovery would increase the average residential customer bill by just 4