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Thursday, April 15, 2010

Want Electric Cars en Masse? Rethink Warranties

Business Week
Separating out ownership and warranties of the batteries may be the key to making electric cars affordable 

For an electric vehicle owner and a utility, a dream scenario for charging vehicles at the lowest possible cost might go something like this: EV batteries draw juice from the grid when demand and electricity rates are low and feed energy back into the grid when demand peaks. That give-and-take could deliver lower electricity bills for consumers and a more stable grid for the utility.

The third factor in this equation, the carmaker, could struggle in this scenario unless the current structure of vehicle ownership and warranties is changed, said Joby Lafky, senior director of business development and partnerships for smart charging startup GridPoint, at a seminar on vehicle-to-grid technology hosted by Agrion on Apr. 7 in Palo Alto, Calif.

The EV industry needs to consider alternative ownership schemes for the battery and to "reexamine what it means to warranty a battery pack," said Lafky. Automakers today typically offer "an odometer-based warranty," he said. If electric vehicle batteries—the most expensive part of the car—are used to provide grid services, the battery will deplete due to all the charging and discharging, not just mileage. So if the battery gets used up faster, and it's within the warranty period, the automaker could get stuck paying to replace it.

Short Useful Life

While the bulk of an electric vehicle may have just as much longevity and durability as conventional models, today's batteries are widely expected to degrade down to 80% of their original storage capacity (and thus reach the end of their useful life in electric cars) after only about eight years on the road. Outside of the vehicle, batteries can hold value long after those eight years.

By offering the battery under a separate leasing agreement, an automaker could have car buyers pay for only the small percentage of the value they're getting (the car minus the expensive battery)—as long as the automaker has a mechanism in place to reclaim the battery after its useful life in the vehicle and reap its "residual value" in secondary markets. However, rolling the battery pack into one contract with the vehicle—rather than covering it under a separate warranty agreement or potentially leasing it separately from the car—could deliver higher warranty costs for the automaker and a higher sticker price for consumers.

Alec Brooks, a renewable energy engineer at Google who previously directed vehicle technology for Tesla Motors, said that ancillary services (such as switching directions between charging and discharging) won't necessarily take a significantly greater toll on battery life than the wear and tear of simply driving the car.

Potential Value Streams

Even so, Lafky isn't the only one who sees shifting ownership and battery warranties as a key to paving the way to more affordable, mainstream electric vehicles that help—rather than hurt—the power grid.

According to Tom Gage, CEO of AC Propulsion, the "most fertile area for development in this whole space is the battery." Regardless of the size, shape, or chemistry that upcoming generations of batteries take on, however, he noted three potential value streams for the device: transportation; grid services while it's in the car; and secondary markets (after useful life in the vehicle). Part of the challenge, said Gage, is to strike the right balance among these three uses in a way that maximizes "extraction of these value streams over the life of the car."

Brett Williams, a postdoctoral researcher at the University of California's Berkeley Transportation Sustainability Research Center, added that the introduction of a viable "novel ownership structure," which could be "battery leasing in a simple form," could represent the tipping point for electric vehicles in the mass market.

Nissan's Strategy

Leasing the battery pack separately from the vehicle is a route that Nissan once considered for its upcoming LEAF electric sedan (Mark Perry, who heads Nissan's product planning and strategy for North America, will be speaking on our New Networked Car panel at Green:Net. Offering the battery pack under a separate financing agreement could allow an automaker such as Nissan to take a significant chunk out of the sticker price of an electric model, potentially helping it compete with more affordable conventional vehicles.In February the automaker announced it would take the more conservative path of offering the car and battery under a "single transaction."

Electric vehicle infrastructure startup Better Place, meanwhile, plans to buy hundreds of millions of dollars' worth of batteries to "swap" into vehicles owned by subscribers, who in theory will pay Better Place for mileage plans the way cell-phone users pay for minutes.

Hypothetically, at least, if all the players and industries can come together, novel alternatives to consumer ownership of car batteries "would really accelerate everything," said Williams. "At a very minimum, you've got to have an ownership structure that lets you see that value throughout the whole product."