Buket AVCI

(with Karan GIROTRA and Serguei NETESSINE)

INSEAD

Is Better Place Really Better?

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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.

Thomas Edison and an electric car in 1913.East German electric vans of the Deutsche Post, 1953.

Buket AVCI 2

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ELECTRICAL VEHICLES….

The Henney Kilowatt, a 1961 production electric car based on the Renault Dauphine

The Nissan Leaf

GM EV1 Tesla Roadster

3 Buket AVCI

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BETTER PLACE V/S CONVENTIONAL ELECTRIC VEHICLES

Battery Cost(c)

Battery Cost(c)

Total Cost of UsageTotal Cost of Usage

Years 1 to T

Electricity @ ce/miKK

EV Car + Battery

Better Place @ p/miKK

EV Car

Total Cost of UsageTotal Cost of Usage

Initial Purchase

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.

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THE BUSINESS MODEL

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

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RESEARCH QUESTIONS

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?

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CUSTOMER BEHAVIOR

N potential customers

8 Buket AVCI

Util

ity

Utility from Driving

Green Utility ~ Heterogeneous

total miles: Y = e + ε and ε~ G

Cost

Cost of Driving

Range Inconvenience Penalty

Y = e + εRange

Customer maximizes the expected utility based on the following utility and cost elements:

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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)

9

Repairable Inventory System

M/G/∞ queue

-Average charging time τ-Electricity cost: ce per miles

Customer Demand for Switching

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Number of customers

Probability ofgoing to station

R)P(Y*N

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ECONOMICS OF BETTER PLACE

Buket AVCI 10

Customer optimizes over miles driven

Customer’s reservation utility is Ugas

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

bpe

QSp NA

cQcecpSE *

,,)(max

Profit fromMiles Driven

Stocking Cost

Battery Investment

gas

e

UeUE

eUEe

rOQPts

)(

)(maxarg

)(..*

SubscriptionFee

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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)

11 Buket AVCI

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MODEL SOLUTION

Customer’s driving decision is set such that

BP’s stocking quantity solves

Per-mile price solves

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No benefit of stocking more batteries than required

12

Cost of Electricity

Cost of Battery Switching Service

21

*

**

)(21)(

eRGNA

zeRgccp

bp

re

rOQP )( **Q

)()1()]([ *** eRgrMpeuE

*p

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RESULTS: BETTER PLACE

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 0*

e

Abp )()(*

XesignX

Asign bp

*p *ebpA

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CARBON EMISSIONS

Total Expected Carbon Emission

where and are per-mile emission from electric and gasoline vehicles.

Adoption and Driving affect in opposite directions:

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Emission from Gasoline Vehicles

Emission from Electric Vehicles

))(1()( *gasgasbpebpbp eAeAEM

e gas

0

bp

bp

A

EM0

*

e

EM bp

bpEM

vs.

Are Better Place vehicles more effective than Conventional Electric vehicles in reducing emissions?

bpEM ?

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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)

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

Customer’s reservation utility is Ugas

Profit per customer

F-cF

max

gas

e

UeUE

eUEets

)(

)(maxarg.. *

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NUMERICAL STUDY - PARAMETERS

Technology-related parameters are obtained from Better Place website.

Customer utility parameters are calibrated using daily driving data from EPA website.

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Parameter R τ c ce cgas r

Value 100 miles 6 hours $ 13,500 ¢ 2.5

per mile¢ 10.9

per mile 99%

16

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COMPARISON OF BP AND CE

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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

-0.035

0.035

-3%

3%

0 1 2 3 4

Em

issi

on (k

g CO

2)

Ado

ptio

n

EMbp-EMce

Abp-Ace

-0.04

0.08

-2%

4%

0 1 2 3 4

Em

issi

on (k

g CO

2)

Ado

ptio

n

EMbp-EMce

Abp-Ace

Range Inconvenience Penalty Range Inconvenience Penalty

2011 Values 2020 Projections

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CONCLUSIONS

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 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.