Vehicle Incentives Required

Initially both Battery electric vehicles (BEVs) and fuel cell electric vehicles (FCEVs) will cost more than conventional cars of the same size and class.  With large scale mass production, however, the added cost of these alternative vehicles are expected to decrease to a few thousand dollars more than current cars.  We use the projections by Kromer and Heywood of MIT, who estimated in 2007 that FCEVs with 350 miles range would cost approximately $3,600 more than a conventional car while BEVs with 200 miles range would cost $10,200 more when both were mass produced.  We assume here that the FCEV would initially cost $250,000, while the full-function 5-passenger BEV would cost $180,000.

In our model, we assume that vehicle costs for BEVs and FCEVs will follow the curves shown below as a function of the cumulative number of vehicles of each type produced:

In their 2008 report on hydrogen and fuel cell electric vehicles, the National Research Council assumed that governments would pay the full cost differential between alternative vehicles and conventional vehicles; with this assumption, they estimated government incentives of $40 billion would be required between now and 2024 when the fuel cost savings would offset the incremental cost of FCEVs.

We have assumed that vehicle owners would pay a $3,000 premium to own a zero emission vehicle like a BEV or FCEV, just as they have paid several thousand extra for gasoline hybrids such as the Toyota Prius.  In addition, we have calculated the annual fuel cost savings for each type of vehicle.

Recall that our model assumes that hydrogen fueling station owners would have to charge a premium price for hydrogen in order to earn a reasonable return on their investments in hydrogen fueling equipment. similarly, companies that install public charging outlets for BEV owners would have to charge high prices or fees to achieve their hurdle rates.  Despite these high prices for hydrogen and electricity, however, the car owners would still pay less per mile than the costs of gasoline projected in the EIA’s 2012 Annual Energy Outlook projections for the cost of gasoline, natural gas (for hydrogen) and electricity; both hydrogen (for FCEVs) and electricity (for BEVs) cost much less per mile than gasoline with the AEO 2012 fuel cost projections; electricity costs less than hydrogen initially, but hydrogen eventually costs less per mile than electricity with the AEO 2012 projections through 2035 and linear extrapolations through 2100.  We assume here that 25% of the electricity for BEV battery charging occurs at work at industrial (not commercial) rates, and 75% occurs at home with higher residential electricity rates.:

Over time, car drivers that purchase BEVs or FCEVs would save money on fuel that would help to offset the added capital costs of purchasing those cars. If the car owners took these fuel saving into account when they make their purchase decision, then lower government incentives would be required to entice them to purchase electric vehicles. Businesses such as FedEx or the Post Office that purchase large fleets of vehicles would make such a calculation of life cycle costs in making their purchase decisions, although ordinary car owners frequently would not take into account total life cycle costs.

The total government vehicle subsidies required for FCEVs are shown here as a function of the number of years of fuel savings accounted for in the purchase decision:

For a private consumer that accounts for only three year’s worth of fuel savings, the government subsides for FCEVs would be only $1.94 billion instead of the $40 billion estimated by the NRC.

For a company with a large fleet of FCEVs that accounts for the full life cycle costs of owning and operating those vehicles over 10 years, the government subsidies required would be reduced from $40 billion from the NRC estimate down to only $73.5 million.

For battery electric vehicles (BEVs), the added incremental cost of the BEVs before large scale mass production swamps the initial fuel savings. Thus if a private consumer accounts for only 3 years of fuel savings, then the government subsidy would have to be $1.07 Trillion (with a “T”!).  As with FCEVs, a fleet operator who calculated the full life cycle costs including fuel savings over ten years would require less than $1 billion in subsidies:

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