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15/02/2012

The Breakthrough of the Electric Car: A business model for electricity companies

As the breakthrough of the electric car finally seems to become reality, more and more studies announce the important role of Vehicle to Grid (V2G) for the profitability of Electric Vehicles (EVs) in the near and medium future1. At this moment, many investors await the technological optimization of the EV and an easier electricity market access through smart metering implementation. The main elements standing in the way of a faster introduction are the high initial investment cost for both infrastructure and vehicles, and a solid business model to maximize its benefits.Sia Partners thinks that the opportunities for the electricity generation and supply industry are definitely present.

The goal of this article is to put in place a profitable business model for EV exploitation through V2G that is easily accessible to electricity companies.

Therefore, we first analyze the different V2G application models by defining their benefits and costs, followed by the proposition of a business model that meets best the challenges ahead. The result is a call for electricity generation and supply companies, amongst other companies in the sector, to lead the way towards of a large-scale implementation V2G which is crucial for the profitability of EVs.

Vehicle-to-Grid application models

The concept of V2G stands for the two-sided integration of the battery capacity of electric vehicles into the grid: besides the grid supplying the necessary energy to recharge the batteries, the batteries could play a role in the operational grid management by regulating the energy flows between vehicles and grid at specific moments.

Before going into detail in the V2G models, we will first highlight the concept of demand response. In demand response, the energy used by the battery to recharge is regulated on demand:

• the battery will typically charge at off-peak hours when enough production capacity is available and electricity prices are relatively low;
• at peak hours, the battery may remain idle so not to further increase peak demand.

The advantages are the lower peak demand for the grid operator and the lower charging prices for electric vehicle owners. The regulation typically happens on demand by the grid operator via an automated process. The effective large-scale implementation of demand response would require an upgrade of the communication infrastructure in the electricity grid.

In case of V2G, we go one step further: the energy stored in the EV batteries can be used to supply electricity to the energy grid in some specific situations. Unlike for demand response, where only a unidirectional connection is required, here a bidirectional connection is established between grid and vehicle so to let energy flow back from the battery to the grid. In addition to an upgrade of the communication infrastructure, this system also requires an upgrade of the DGO energy transport and metering infrastructure to support these bidirectional flows.

The application of V2G opens many perspectives which can be grouped in different models:

1. The first model is analogous to demand response but works in two directions. The batteries will charge when prices are low and production capacity ample (as for demand response), while they will supply energy to the grid at peak times. The battery owner is paid for these services to the grid. Since the energy flows would be controlled by the grid operator, this approach would require the establishment of bilateral contracts or a legal framework;

2. In the second model, the total battery capacity in the owner's portfolio is sufficiently large, thus for a fleet of EVs, the owner may choose to participate directly in the BELPEX market or the primary or secondary reserve market:

a. In order to trade on the BELPEX reserve market, the fleet owner is allowed access either by being an ARP or by negotiating access with an existing ARP, or through a bilateral contract with a broker2.

b. In order to offer capacity on the reserve market, the owner needs a CIPU contract with Elia for each involved connection point on the Elia grid. In addition, the following technical constraints apply 3:

i. For the primary reserve market, the reserve capacity has to be minimum 1MW and must be available 24 hours a day. The provider is rewarded for the offered capacity.

ii. For the secondary reserve market, the capacity has to be at least 10MW and is contracted in 15min intervals. The provider not only gains for his offered capacity, but also for the amount of energy effectively provided to the grid.

3. The third model applies in the case the owner of the EVs is a large consumer, electricity producer or ARP, he can use the battery capacity to balance its portfolio in order to avoid imbalance fees, as an alternative solution to trading on the short-term (intraday) wholesale market. This is for instance true for market players with a substantial amount of intermittent energy sources in their portfolio. As an example, recent studies have shown that the average off-shore wind farm loses up to 15% of its revenue through imbalance fees due to the unpredictability of intermittent sources 4.

The challenge of V2G thus lies in maximizing revenues through one or several of the application models discussed before, while minimizing the infrastructure and investment cost and facilitating market access.

Tackling the challenge, part 1: EV fleets

One way to reduce the infrastructure costs, already more and more appreciated by some companies (Siemens, Ernst&Young)5,6 , is the use of central deposits and charging points for a fleet of electric vehicles. Besides reducing the initial cost per vehicle, a fleet also means a partly off-set of the limited range and long charging times of electric vehicles through adequate planning and reserve management. This strategy also has the major advantage that it doesn't require a full implementation of smart grid technology since only one access point per depository is required. As such, the use of fleets greatly facilitates large-scale grid penetration of EVs.

In addition, EV fleets allow large electricity consumers to balance their load which may be profitable depending on their contract.

Specifically for Belgium, with the rehearsal of the company car tax system, one of the few cars that remain unaffected is the electric vehicle. Companies can still deduct 120% of the bought EV value from their profit before tax, while the cost of most other non-electric cars has sharply increased.

Tackling the challenge, part 2: the role of the electricity industry

When we look at the V2G application models for EV fleets, it is easy to see the synergy with the electricity generation and the electricity supply industries. Through EV fleets, the total battery capacity is large enough to participate in the electricity reserve markets while the access to these markets is greatly facilitated through the existing supplier/ARP contracts. Since the EV battery capacity can be traded together with the supplier's existing traded volumes (both on the Belpex market as for reserve capacity), the initial access is even further facilitated.

The battery capacity which is not used for reserve capacity can also be used internally to avoid imbalance issues. Indeed, the EVs may be used to stabilize production or balance the ARPs portfolio and avoid or reduce imbalance fees.

An overview of the EV battery capacity usage is given on the figure below:

Since the investment costs remain high, electricity companies could look for business partners to cooperate in EV/V2G projects. In fact, they can even offer the possibility of a joint investment as a supplementary service to existing and potential clients. While this means a sharing of the benefits, it also includes a partitioning of risks and costs, and a boost to the green and innovative image of both companies.

In other words, a combined approach of EV fleet investment by electricity companies allows for a fast and efficient implementation of V2G while maximizing revenues through synergies with the existing business models of most of companies.

Conclusion

The EV fleet offers the opportunity for electricity generation and supply companies to add a new service to their current package: sharing the investment costs of EV fleet providers (car leasing companies or other companies) while sharing the revenues obtained through lower fuel costs, low taxes on company cars, reduced imbalance fees and the V2G revenues from market participation and self-balancing. In addition, investments in EVs can play a crucial part in the green, innovative and dynamic company image that is strived after by many companies in the sector.

The electricity generation and electricity supply industries should therefore not wait for other firms to take the lead in EV fleet investments in the light of their unique position with regard to the profitable V2G business through the many synergies with their existing activities.

Sources

1http://www.nationalgrid.com/uk/Media+Centre/PressReleases/2011/10.05.11+...
2http://www.belpex.be/index.php?id=45
3http://www.elia.be/repository/pages/8ea35dd1f1c0419385ab0b479296be47.aspx (S. Grid Support)
4http://www.esat.kuleuven.be/electa/windbalance/docs/Conferences/conf8.pdf
5http://www.power-link.be/siemens-belgi-met-fotovolta-sch-slim-energienet...
6http://www.ey.com/BE/nl/Newsroom/News-releases/Ernst---Young-kiest-voor-...

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