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Hybrids: For Commercial Fleets, Cost-Effective Bridge to Electric Vehicle Future

July 18, 2012

By Clay Siegert, VP of supply chain at XL Hybrids Inc.

Is the age of commercial electric vehicles finally here?

If recent announcements of electric vehicle (EV) purchases and development by Frito Lay, FedEx and Verizon are indicative, then the answer is, “almost, but not quite.” Frito and FedEx have said they will buy small batches of electric trucks, while Verizon has agreed to collaboratively develop electric drive technology with a third-party EV maker.

For all three of these National Clean Fleet Partners, these moves will increase the numbers of alternative technology vehicles already in their fleets. Commitments like these by major corporations are commendable for reducing fuel usage and emissions and are critical to spurring the nascent commercial EV market. Customer purchases beget greater investment by suppliers and manufacturers in technological advancements to increase performance and reduce cost of components such as lithium-ion batteries and electric motors, which leads to more customer purchases.

However, judging by these fleets’ relatively small EV order quantities today, it does not appear that the industry has reached the stage where this type of mutually beneficial virtuous cycle for EV development is in full swing. Last year, 18,000 EVs were sold in the U.S. — about 0.2% of new vehicles sold despite a significant government incentive — but just a few were for commercial applications.

The EV Sticker Price

Right now, there is a chicken-and-egg problem, where customers need lower prices to justify purchasing large quantities of EVs, but manufacturers cannot yet lower EV costs (mainly battery costs) enough without more customer orders. As a result, fleets can only make small quantity purchases of the few commercial EVs on the market, which can cost from $50,000 to $150,000 each.

With EV sticker prices at such a premium over conventional vehicles, mass adoption of commercial EVs still appears to be many years away, with the biggest roadblocks being cost and payback. Other hurdles for adoption include the unknowns around battery life and range and the required changes to daily fleet operations for plugging in vehicles.

Various research reports indicate that EV sales will rise substantially as EV costs fall, but not until later this decade. Other research is exploring ways to quicken EV payback periods to spur faster adoption. For example, a recent Massachusetts Institute of Technology study (for which I was an industry adviser) researched paybacks on commercial EVs in various scenarios.

The study found that EV payback periods could be reduced to fewer than six years if EV batteries were used to provide ancillary energy services back to the electric grid, netting fleets up to $1,400 in annual revenue per vehicle. While promising, enabling EVs to have vehicle-to-grid capability is still years away from mass adoption. Plus, six-year paybacks are still too long for most fleets.

Adopting Electric Drive Technology

So, if fleet owners are looking for substantial fuel savings through the adoption of cost-effective electric drive technology, what should they do while waiting for EVs to get up to speed over the next decade? Adopt hybrid electric vehicles (HEVs), which already make economic and operational sense for fleets today.

In an industry where lithium battery costs remain prohibitively high — too high for EVs with large 20+ kWh battery packs to achieve reasonable paybacks without help from government incentives — HEVs use smaller 1.5kWh battery packs and have correspondingly lower costs.

Despite being low-cost technology, HEVs can still yield substantial fuel savings of up to 25% for fleets, meaning HEVs are cost-effective today without government incentives for many commercial applications.

Let’s look at some numbers: Say a fleet vehicle drives 100 miles per day for 250 work days per year in urban and suburban stop-and-go driving, and normally gets 10 MPG with gas at $4 per gallon. An HEV achieving 25% fuel savings would yield $2,500 in annual savings. With an approximate $7,000 premium for an HEV, the payback is less than three years. This type of payback is not achievable with most EVs today, and likely won’t be for years.

Integrating Hybrids in Fleet

Operationally, HEVs are simpler than EVs for fleets to manage. Fleets are inherently risk averse since fleet performance is often measured by benchmarks such as vehicle uptime and route efficiency. So when it comes to adopting new vehicle technology with a risk-reward tradeoff (operational changes to achieve fuel savings), fleets take their time to vet.

Such is the case with EVs today due to range anxiety, especially in areas with extreme seasonal temperatures that can reduce battery performance. The required operational changes around plugging in, including the installation of charging infrastructure and rerouting vehicles based on range, also pose an issue. Meanwhile, HEVs have none of these limitations, except putting them into urban and suburban routes. Just turn the key and drive. There are no plugs to worry about. There are no refueling concerns.

HEV technology offers a compelling value proposition. Adopting it can be a cost-effective and immediate way for fleets to achieve meaningful fuel savings without impacting their daily operations. Adopting HEVs can be a bridge for fleets awaiting the promise of EVs in the future, and even help the long-term EV cause by increasing the market over time for the many components (e-motors, batteries, power electronics) that both HEVs and EVs share.

While the point when EV technology makes more economic sense than conventional vehicles is approaching, the point where hybrid electric technology makes more economic sense than a conventional vehicle is here today.


About the Author

Clay Siegert is the VP of supply chain for XL Hybrids. He leads supply chain management and product development strategy. He holds a master’s degree in engineering from MIT.

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