electric vehicles

Ahh, how the petty world of politics doth make fools of us all.  It is not enough that Elon Musk is trying to start a new car company in a market segment ruled by massive multinationals.  He is ratcheting up the risk level by taking on a  great deal of technology risk as well.  And in the process, he is doing tremendous legwork for future producers to get an electric drive train working well, and also to create an electric vehicle that onlookers envy rather than mock. 

Trouble with the batteries?  No problem.  Just build a massive, multi-billion dollar factory (though maybe they can still change the name from "Giga Factory" to something a bit catchier...) to make lithium batteries at a scale that can bring costs down both through high volume production and through incremental learning and technical improvement.  And if you happen to have large volume production of these batteries while also being Chairman of a large solar panel leasing firm (Musk started Solar City), why not use some of those batteries to help the PV sites store power?  It's at least a twofer:  the storage helps better match onsite production with onsite consumption, and can also enable PV producers to sell stored power back to the grid during periods of higher value.  The expensive panels are being leased anyway; adding a few battery packs won't make it markedly more complex.  And if you upend the utility industry by boosting the ability of self-generated power to substitute for grid-supplied juice, all the better.

Let's give the guy credit.  Elon Musk is taking on the economies of scale for both electric vehicle and battery production -- high risk endeavors that, against huge odds, he may actually succeed at.  And Solar City isn't exactly low risk either. 

So Governor Christie ought to be out there thanking the guy for the work he's doing, knowing that the road to success remains long and hard, but nonetheless admiring Musk's role as an outsider taking on the power structure to build a better society.  That is, after all, what Christie himself did back in 2009.

If you add enough fixed costs, maybe even Elon will drown

Alas, Christie took the vested path instead.

His appointees issued a regulatory ruling to block direct Tesla sales in NJ without at least letting the issue be argued in court.  The effect is to lump on another layer of large fixed costs to roll out the vehicle -- adding the sales network to the already high risk areas of vehicle and battery manufacture. 

Selling too few cars to support a dealer network like GM can? Too bad:  Governor Chris says you need an independent network anyway.  Who cares if your product directly competes with the vehicles they are making most of their money on and might generate a conflict of interest.  Selling an idea as well as a car, and need a specially trained staff?  No problem: the existing dealers can do it.  People will flock to them to chat and learn:  after all, bartering for a vehicle is one of most people's favorite activities and car salepeople among their favorite teachers.  High level of training needed to explain the new technology and the complex financing approach?  Again, somebody in that independent dealer network could learn to be that trusted communicator.  They may have to:  the independent dealer networks receive regulatory protection from direct sales of automobiles in at least 48 states and dealerships with protected franchises that date back 99 years in some cases.   (Dan Crane did a nice write-up on the history of these market protections last year.)

Does it all tie back to the bridge?

Let's give Christie a break.  Maybe the decision to restrict direct sales in NJ really isn't about politics.  Maybe Chris Christie is just worried about the well-being of New Jersey residents, and felt that the charging station issue --  you know, range anxiety -- required him to act.  Christie knows that sometimes drivers in his state get tied up in massive traffic jams on the George Washington Bridge near Fort Lee.  Who knows when this will happen again? Or where?  It's not as though the GW Bridge is the only possible site: other places yet-to-be named could also experience one of Chris' trade mark "FLASH JAMS". 

So he is worried.  He is worried that people driving Tesla's on that bridge (or location to-be-named later) could suddenly find themselves not moving for hours.  And they would run out of power.  And be stranded, maybe forever (who knows -- Governors need to think about worst case scenarios).  To ensure this doesn't happen, maybe Christie is looking out for the little guy here to make sure Granny isn't left toothless on the bridge, and with no food or water or place to plug in. 

Well, this could be what is happening, couldn't it?  Quick:  somebody check the e-mails.  They keep finding new information.  Has anybody searched "Tesla" yet?

Gecko power

Hey, if it does turn out to be just routine political pandering, what is Tesla to do?  After all, vehicle sales aren't the only industry to be hamstrung by old regulations that protect incumbents against new ways to provide the same good or service cheaper, faster, or better.  Taxi-cabs are another great example.  They are often licensed at the town, city, or county level, rather than the State.  Those licenses (medallions) can be worth hundreds of thousands of dollars each (and more than $1 million in NYC) -- a good proxy for the value of the operating monopoly.  And as a result we have the rather bizarre outcome in which many suburban cabs drop customers off at the airports and leave empty while city cabs leave the airports full and come back from surrounding towns empty.  Both practices burn a ton of extra gas (and a ton of driver time).  Yet at the same time, we see growing regulations forcing cab companies to buy energy-efficient and more expensive "clean" cab fleets to reduce their climate and air pollution impact.

Market changes that affect entrenched industries or marketing arrangements often trigger fierce political battles.  Following the NJ ruling, Tesla's initial strategy is one of bypass, directing customers to check out showrooms in NY and PA.  But longer-term, Tesla should be looking for allies to help overturn restrictions on direct sales of automobiles.  The ideal candidate would be somebody in a related industry that has also faced challenges in being able to direct sell; who has enough clout and power to just perhaps get the rules rewritten; and who might see profits rise if the luxury Tesla vehicle starts to sell in larger numbers.  Any suggestions?

DOE has recently unveiled a price comparison tool to illustrate the reduction in fuel costs experienced by owners (or future owners) of all-electric vehicles.  The screen compares the expensive cost per gallon of regular gasoline to the much cheaper energy equivalent in electrical power needed to move a vehicle the same distance.  The intent of the tool is a good one, and, in fairness, DOE's methodology does seem to accurately portray the comparative cost per gallon to the end-user.

Part of the cost savings is simply avoiding user fees to fund roads

That said, quite important information is missing and should be added.  "Free-riding" is an economic term that describes consumers who use a good or service without paying a fair share of the costs associated with making that good or service possible in the first place.  Jumping the turnstiles on a subway is a common example given, since the incremental cost of that one rider is quite low (often quite close to zero) -- but if lots of people jumped the turnstiles, the ability to repay the fixed costs on the subway infrastructure and related employees would be severely compromised.

Enter eGallon.  Electric vehicles, just like their gasoline counterparts, are using roads and highways.  Yet, while gasoline vehicles pay billions per year in taxes (26.4 to 71.9 cents per gallon of gasoline according to July 2013 data compiled by the American Petroleum Institute, a trade association), all-electric vehicles play quite close to zero. 

The vast majority of the taxes collected on conventional motor fuels goes to build and maintain roads -- funding the infrastructure that all drivers use.  On paper, some gasoline taxes do go to other, non-road uses (such as to fund mass transit). At the same time, however, there are large financial flows into road building that come not from user fees but from general tax revenues or other mechanisms such as tax-exempt road bonds.  These flows are so large that, on a net basis, the current levels of gas taxes going to all uses are well below what is needed to support road construction and maintenance alone.  Thus, attributing all gasoline taxes to roads is a quite reasonable simplifying assumption for the comparisons shown in the table below.

Sales tax exemption for electricity consumption is a big subsidy to the power source

What about taxes paid by electricity consumers?  Again, in principle, these would reduce the distortions in DOE's comparisons because some taxes would be captured for both fuels.  In practice, however, there is not likely to be much of this going on.  An Earth Track review of fossil fuel subsidies in five US states found that in most cases electric power consumers paid no taxes at all on their consumption even when there were wide-reaching sales taxes on other goods and services in the state.  This exemption, often available to commercial and industrial power consumers as well as residential, was among the biggest state subsidies to energy uncovered by our review.  The lack of any tax on electricity means that electric vehicles are literally free-riding on highways, at least for now. 

Even with tax adjustments, there are savings from eGallons relative to gasoline gallons.  But as shown in the table below, tax avoidance is a material component of the savings presented by DOE.  On average across the country, avoidance of state and federal gasoline taxes comprised more than 20% of the cost differential for July 2013.  In some states, such as California, this rises to more than one-third. 

eGallon should differentiate between tax avoidance and real savings

DOE ought to update its display so the differential contributions to our road transport system are visible in their comparisons.  For now, the importance of this change is accuracy in messaging; the impact on highway funding from electric vehicle avoidance remains low due to the small fleet of electric vehicles presently on the road.  But as the number of eVehicles using eGallons continues to rise, ways to ensure these drivers contribute equitably to the highway system they rely on will be needed.  And having DOE update its eGallon calculations now will also ensure that the growing number of states starting to charge annual registration fees to electric vehicles owners to recoup lost road tax revenues will be properly reflected in their comparisons as well.

State and Federal Gas Taxes Comprise a Material Share of eGallon Savings Relative to Gas
($/gallon unless otherwise noted)