info_mark
Insights at UBC Sauder

Werner’s Blog: How much money could Canadians save by driving electric?

Werner
Posted 2020-08-06
scroll_arrow

In this excerpt from his latest blog post, Werner Antweiler, Associate Professor & Chair, Strategy and Business Economics Division at UBC Sauder, analyses the significant savings over conventional vehicles that Canadians in different provinces will enjoy as electric vehicles become more mainstream and their upfront costs continue to drop.

Today's electric cars (EVs) tend to be still more expensive than their gasoline cousins because of the cost of batteries and the cost of charging infrastructure. However, battery parity—the point at which EVs have the same cost as equivalent gasoline-powered vehicles on a fully amortized basis—is expected for the mid-2020s as the cost for batteries is falling every year. EVs are already cheaper today by a wide margin on the basis of fuel costs only; it is the fixed cost of buying an EV that is holding back EVs from already taking over the market. Driving with electricity is cheaper than driving with gasoline, and is hugely more environmentally friendly when the electricity is from clean sources, as it is in British Columbia and Quebec.

Consider the following back-of-the-envelope calculation: a typical car consumes about 9 liters of gasoline per 100 kilometers, some less and some more, and more in city driving than in highway driving. Let us assume that the average car drives 15,000 kilometers per year. An electric vehicle consumes roughly 25 kilowatthours (kWh) per 100 kilometers, once you include air conditioning or other electricity use in the car. The average cost of gasoline last year was around $1.30 per liter, and the average cost of electricity was around $0.13 per kWh. This implies that the annual cost of driving with gasoline is $1,755 whereas the annual cost of driving with electricity is $487.50. Driving with gasoline is about four times as expensive as driving with electricity.

The saved fuel cost translates into big numbers when you consider the total amount of fuel that is purchased every year. How much could Canadians save if they all switched to driving electric?

The cost savings differ across provinces because of differences in gasoline prices (and taxes) and differences in the cost of electricity. Gasoline is most expensive in British Columbia and Quebec. Electricity is cheapest in the hydro-rich provinces British Columbia, Manitoba, and Quebec. Thus, it is not surprising that the largest savings to be had are found in British Columbia (77 per cent reduction in cost); Manitoba (74 per cent reduction in cost) and Quebec (82 per cent reduction in cost).

Translated into dollar terms, the savings are enormous: about $7 billion in B.C., $22 billion in Ontario, and $11 billion in Quebec.

There are a number of caveats that apply in this highly simplified analysis. First of all, vehicle fleets have different fuel efficiencies across provinces, and the composition of urban versus highway vehicle use differs across provinces as well. Savings thus would be smaller where vehicle fleets are already more frugal, while savings would be larger where vehicle fleets are thirstier. Still, the magnitude of the savings remains very large even with this caveat.

Another caveat is the assumption that electricity prices would remain unchanged when there is huge extra demand for electricity. Electricity prices could go up if the entire vehicle fleet changes to electricity. But how much? The levelized cost of new electricity capacity would not necessarily increase much; this is mostly determined by technology. The more likely source of cost increases would be the investments in local and long-distance transmission capacity expansion. Still, even if electricity prices rise by 50 per cent, driving electric would remain a bargain.

Yet, the impact of more EV charging on electricity prices may be more benign if EV charging takes places during off-peak periods, when electricity's marginal cost is low. Rather than deploying huge amounts of new generation capacity, clever incentive programs can simply shift demand to when there is sufficient slack capacity. Time-of-use pricing can induce such shifts, as smart EV chargers can be programmed to charge cars during low-price periods.

There is a much more significant caveat to the above calculations than the effect on electricity prices: the effect on tax revenue. A significant chunk of fuel purchases goes to provincial and federal governments as tax revenue; roughly about 30 per cent. Fuel consumption levies in Canada include the federal 10 cents per litre fuel tax, provincial fuel taxes and local levies (such as for supporting public transit), federal and provincial carbon levies, and the GST/HST. This amounts to 35-50 cents per litre depending on the jurisdiction. Switching to EVs would eliminate the carbon tax revenue, as it should. However, other taxes still are needed to cover road construction and maintenance or support public transit. This revenue will still be needed in the future even if motorists adopt EVs. Over time, we can expect that provincial and federal governments will seek a shift in the tax base to charge motorists for road use. There can be no direct tax on electricity because electricity is not just used for charging EVs. Instead, a new tax base is needed that is linked directly to road use. Economists have the answer for this as well: either a Vehicle Miles Travelled (VMT) Tax or a Congestion Price, ideally differentiated by location and time. Broad adoption of EVs will therefore trigger the need to rethink our tax system as it applies to motor vehicles. As the tax revenue from gasoline dwindles, governments need to be prepared to explore new sources of revenue that not only support our road infrastructure but also manage the negative externalities from road use.

During the transition to EVs, early adopters will benefit from more significant cost savings than late adopters. There are even many retail stores that offer free EV charging. But free charging may also come with the problem of everything that is free: overuse. Tiffany Crawford reported in the Vancouver Sun last year that B.C. drivers bicker at EV charging stations as the number of pubic charging stations is still quite limited. According to Plug-In BC, "the majority of Level 2 public charging stations are free to use, but many require drivers to join a service network to access the stations". Many EV drivers continue to receive a free lunch, and I expect many retailers to provide free EV charging in order to promote sustainability and attract customers. For example, furniture retailer IKEA installed free electric vehicle charing stations at all its 12 Canadian locations. Some of these charging stations were supported with provincial grants. Maps of charging stations are readily available at ChargeHub, PlugShare, ChargePoint, and Flo. The density of the charging network is expected to increase significantly in the coming years.

Looking back at 2020 from 2030, I dare to predict that we will come to regard the 2020s as the decade in which the automobile industry became electric—the "rEVolution." This is what’s needed if we want to meet our climate action targets in Canada and around the world. Electrification of the vehicle fleet must go hand in hand with retiring fossil fuel use from our electricity generation mix. Canada is already well on its way toward this goal of clean electricity while our neighbour south of the border still has a long way to go. If you live in British Columbia, as I do, driving electric is environmentally friendly and increasingly economically attractive.