Business Report

Making Electric Vehicles Pay Off

Can companies with fleets of cars take advantage of the electric vehicle’s efficiency dividend?

Commercial fleets are a logical place to introduce battery-powered electric vehicles. After all, fleet vehicles operate with relatively predictable driving patterns, return to a central location overnight, and are managed by sophisticated logistics professionals who can weigh the cars’ lower fueling and maintenance costs against their premium purchase price. Last year, managers of large fleets began exploring in earnest what EVs offer, kicking off demonstrations that will come to scale this year.

Greener Ruffles: An electric truck operated by Frito-Lay.

Companies such as FedEx, PepsiCo (through its Frito-Lay business), and AT&T are each deploying tens to hundreds of electric delivery vans from manufacturers such as Navistar, Smith Electric, and Azure Dynamics. And in November General Electric announced an aggressive plan to make EVs account for half of its 30,000-vehicle fleet by 2015 and to lease another 10,000 EVs to other commercial fleets managed by GE Capital.

Motivations vary. Going electric confers an image of corporate responsibility on these early entrants, and for GE it also primes the market for wares such as GE-designed charging stations. But Oliver Hazimeh, director of the automotive practice for the Boston-based management consultancy PRTM and an author of a November 2010 report on fleet electrification, sees more than a marketing play. Hazimeh says the early adopters anticipate an inevitable shift to electric transportation and are learning through doing: “They’re all looking at the fundamental drivers and saying oil prices are not going to be cheaper and less volatile, emissions regulations are going in one direction, so for the longer term we have to start turning our fleet toward this technology.”

That idea is based on projections that the cost of lithium batteries will plummet over the coming decade. PRTM’s analysis shows EVs offering the lowest overall cost of ownership for fleet vehicles between 2015 and 2018 as lithium battery costs drop below $400 per kilowatt-hour, from an estimated $600 per kilowatt-hour in 2010.

However, it’s not certain that battery prices will drop that steeply, and major automotive players such as Toyota are betting that they will remain high through 2020 (see “Will Electric Vehicles Finally Succeed?”). This uncertainty, coupled with the batteries’ unproven life expectancy, represents the biggest challenge for fleet operators struggling to make a business case for electric vehicles. “We don’t know exactly how long the batteries will last,” says Hazimeh. “At the end of the day, if I resell the car at auction and have this huge risk provision, it muddies the water quite a bit.”

The result is that companies won’t be adopting EVs on a large scale until corporate managers change the way they lease and operate cars for their fleets. Such changes, combined with government incentives, could be enough to make EVs the lowest-cost option for some fleet vehicles. The key change, according to Hazimeh and some fleet managers, is how frequently vehicles are replaced.

Most fleet managers currently turn over their vehicles within six years, around the point when maintenance costs have traditionally tended to rise. That schedule probably won’t maximize the extent to which EVs, which have simpler mechanical components than conventional cars, can deliver long-term maintenance savings.

As an example, consider vehicles used for sales and service calls, which average 71 miles per day—a good fit for the 80-to-100-mile range offered by EVs such as the Nissan Leaf. Under that load, each car may need a new battery after five years. Replacing the car one year later would bring its cost for the company to 35 cents per mile traveled, according to PRTM. That’s seven cents per mile more than an equivalent gasoline car. Hold the car for nine years, however, and the EV’s ownership cost drops to that of the conventional car. With the $7,500 federal tax incentive for EVs factored in, the car becomes an economic winner.

AT&T’s unconventional practice of retaining fleet vehicles for 10 to 12 years helps explains why Jerome Webber, its vice president for fleet operations, projects a payoff from electric vans that AT&T began rolling out in December—Ford Transit Connect vans equipped with Azure Dynamics’ lithium-battery-powered drivetrain. He estimates that the vans will cost 10 to 12 cents per mile—less than half as much as a gas version of the Transit Connect and a third as much as the beefier gas-powered vans AT&T uses today. “If we were churning these vehicles every three to five years like most fleets do, we couldn’t do this,” says Webber.

Webber says AT&T will have 20 of the electric vans operating by the end of this year, and their performance will determine how quickly the switch progresses thereafter. He believes that EVs could already be a viable option for a quarter of AT&T’s 75,000-vehicle global fleet.

For some companies, the initial expense of the EVs will be an obstacle. James Steffen, director of fleet engineering and technical support for the Memphis-based lawn-maintenance firm ServiceMaster, says that’s the case for his firm’s 16,000-vehicle fleet. “Capital is a scarce resource,” says Steffen. “Sometimes you have to accept a higher total cost of ownership because you literally can’t afford the capital for the lower-cost-of-capital truck.”

Steffen says it is vehicle manufacturers and leasing firms that must adapt, breaking out electric batteries as a separate lease item to make EVs affordable. That’s not part of GE Capital Fleet Services’ strategy to move 10,000 EVs by 2015. At least not yet, says its chief strategy officer, Deb Frodl: “As of today, we are planning to lease the vehicle and battery combined. That said, as a fleet management company focused on finding the right business solutions for our customers, we will continue to monitor this emerging industry and to evaluate all options.”

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Corporate Energy Strategy

The unclear prospects for energy policy in the United States are complicating life for businesses, which don’t have the luxury of avoiding an energy strategy. In Business Impact this month, we explain why every company needs to be rethinking the ways it consumes electricity and raw materials. Companies’ approaches to using energy and other resources are becoming a crucial part of how their brands are perceived. Spikes in energy prices can damage a company’s finances. And new analyses of how products are made can save companies money. We dive into the technologies that businesses ought to consider, and we explore new models for funding energy upgrades.

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