Some Math Behind Electric Vehicles

The following was original published in CE Vision Magazine. You can download the full issue here.

The presence of electric vehicles at CES continues to grow with 2011 setting records on multiple fronts. As gas prices rise and show little sign of retreating any time soon, interest in electric vehicles will continue to peak in the years ahead. Here is some math to consider.

First, electric vehicles are good for domestic economic growth. Remember, economic growth in the U.S. is measured by GDP which consists of consumption + investment + government spending + exports – imports. Every dollar we import counts against domestic growth as we measure it under GDP. This includes things like lumber from Canada, consumer electronics from Asia or oil from the Middle East. If we replace vehicles that use traditional combustion engines with electric vehicles we presumably need to import less oil. We replace that oil demand with electricity demand that is created (and consumed) here in the U.S.

Adding an electric vehicle to a household should reduce the gasoline consumption of that household significantly, but it will conversely increase the electricity consumption. A single electric vehicle will increase electricity consumption by a third to one-half and two electric vehicles will consequently increase the electricity use for that household from 60 percent to possibly double the electricity use of that household.

Technology diffusion has a geographic component. A neighbor buys a new technology— be it a computer or an electric vehicle—and some of the first to notice are those most intimately associated with that individual. These are frequently neighbors, family, coworkers or other individuals in overlapping social circles. They likely live in relatively close proximity to one another, creating a geographic factor as technology diffuses from one party to the next. In the case of electric vehicles, this geographic component might be exacerbated in the earlier years because some of the vehicle manufacturers are restricting the markets where the vehicles can initially be purchased. Driving Demand Where might we see high electric vehicle adoption in the future? Basic accounting suggests electric vehicles are most financially lucrative in areas with the lowest electricity prices. The average retail price for electricity in the U.S. is roughly 12 cents per kilowatt/hour. Many of the states with the lowest electricity rates are in the western U.S. Another factor likely to influence electric vehicle demand is average miles driven. The fewer daily miles driven, the more cost advantageous an electric vehicle becomes. According to somewhat dated information from the U.S. Energy Information Agency (EIA) that has presumably not changed in relative terms, individuals in the western U.S. travel the least during the year. While we don’t have daily miles driven, these figures likely provide a good proxy and highlight another positive attribute to western states when it comes to identifying future electric vehicle demand.

Because electric vehicles can be expensive, household income also will play a role in diffusion. As you might surmise, above average household incomes are typically correlated with higher electricity costs. Only nine states have above average household incomes and below average electricity prices. Many of these states are in the West where miles traveled are relatively low. These include Colorado, Nebraska, Oregon, Utah, Washington and Wyoming. The other states not in the western U.S. are Iowa, Minnesota and Virginia. There are a variety of intangible characteristics that will influence electric vehicle demand and the subsequent impact and timing they have on the U.S. economy. If I was making the call today, I’d watch the nine states listed above.