How Electric Vehicles Could Lower Your Electric Bill
By: CELI Fellow
During last year’s Super Bowl, I heard a guest vent at the many advertisements for electric vehicles (“EVs”). He said something like “How can I benefit from these luxury cars? I cannot afford any of them!” Much has been written about the often-prohibitive upfront price of EVs. Less understood is the potential for everyone, including those that do not drive EVs, to benefit from the electrification of transportation.
Understanding how utilities incur costs is the key to understanding the potential of EVs to reduce electricity bills. There are two classifications of costs that are important here: energy and capacity costs.
Energy costs are costs that are incurred on a per kWh basis. The main driver of energy costs is fuel — for every kWh consumed the utility must burn more natural gas or coal. As renewable energy becomes a larger part of our electricity system, energy costs should fall. Sunlight and wind are free, so once renewable assets are built there will be fewer energy costs associated with delivering the average kWh.
While renewables are good for reducing energy costs, the reverse is true for capacity costs. These are the costs of ensuring that the electric system has enough capacity so power can be supplied at any time. Utilities need to plan for when the demand for electricity is greatest (peaks). System planners may determine that they need another power plant to ensure that they have enough reserves to keep the lights on during the peak. This is what drives capacity costs, and it is no small matter. Today, capacity costs can constitute roughly half of utilities’ costs.
I like to think about capacity costs like a highway. Except, this special type of highway fails if there are too many vehicles on the road and therefore, planners cannot allow any congestion. Thus, it may be necessary to build a highway with 100 lanes. Even if 99% of the time most of the lanes are empty, all 100 lanes are needed to keep the highway open. If planners believe that a future rush hour will result in traffic of 105 vehicles, then an additional 5 lanes need to be built. Regulators, customers, and society, in general, have a very low tolerance for a utility that lacks enough capacity and has to resort to rolling blackouts. (Full disclosure: I have borrowed this analogy for a speaker from Duke University’s excellent “Energy Week” Conference, but could not recall the exact speaker).
The nature of renewable energy is expected to increase the capacity costs of utilities. If a system is powered only by solar and wind generation, there would be virtually no energy costs. However, planners will need to not only consider when demand for electricity peaks, but when sunlight and wind may reduce how much energy renewable assets generate. For an hour when sunlight is only half as intense, planners will need to build twice as much solar energy!
All the costs of building more solar and wind assets to ensure consistent and reliable service will increase capacity costs. Batteries can help by storing energy during times of plenty and discharging energy when needed. However, batteries are not free. They need to be built, maintained, and eventually replaced — all activities that further increase capacity costs.
The key question for EVs is how they will affect the costs of the electric system. As more renewable assets are built, it will be less and less relevant as to how much energy EVs consume and more relevant when they consume it. In other words, does the addition of EVs lead utilities to build more solar and wind farms (or energy storage)? If EVs charge during a peak, they can quickly drive electric demand up and increase capacity costs — ultimately increasing everyone’s power bill. This is the great danger of EVs.
On the other hand, if EVs charge when there is already excess capacity in the system — when the addition of extra demand would not necessitate the building of another power plant or battery — then EVs will drive costs for everyone down. Simply by paying their electric bills, EV owners help pay for the shared costs of maintaining and upgrading the electric system. In this scenario, EVs would not cause either a significant increase in capacity or energy costs. After all, the beauty of an increasingly renewable system is that sunshine and wind are free!
Happily, odds are that EVs will reduce power bills. Today, the peaks in electricity demand are generally due to the weather (i.e., the peak is a result of an extremely hot or cold day). EV charging is not expected to be very weather sensitive. As a result, times of maximum electric demand are not necessarily times of peak EV charging. For example, many peaks occur during cold winter mornings when few EVs are expected to be charging (having had all night to charge).
Utilities and planners should not leave this up to chance. EVs are still in their relative infancy and the habits of their owners are still moldable. Utilities, policymakers, and carmakers should all encourage programs that encourage EVs to charge when it is cheapest. This can help utilities build fewer power plants and reduce costs for everyone. In this way, the adoption of EVs can benefit everyone through lower electric bills, even those that do not drive EVs directly.
