1. Socio-environmental goals of the Automobile industry

The automobile value chain consists of product planning and design, raw material extraction, logistic and transportation, supplier parts manufacturing, car-maker manufacturing, sales and services, use and end of vehicle life.

The automobile industry plays a key role in the economy and thus in the pursue of sustainable development (Climate Action, 2014). Consequently, automobile manufacturers are being pressured by Governments and consumers to embed sustainable goals in all the stages of the value chain and work with stakeholders to measure impacts and maximize value. To achieve these goals, automobile manufacturers will have to engage with suppliers to increase the sustainability of their operations (in terms of CO2 emissions reduction, waste reduction, water and other natural resources consumption).

With reference to the “end of vehicle life” stage, automakers should not only focus on reducing waste production and waste to landfill, but they should also find a way to close the loop through circular economy (EU Automobile Manufacturers Association, 2015). In fact, studies show that large-scale exploitation of natural resources will result in depletion and that the increasing amounts of waste generated by mass consumption will result in environmental pollution. To limit this phenomenon, automakers should implement a circular model based on resource-recycling to improve resource efficiency. Manufactures should use ecological materials with low environmental impact, making use of parts longer, develop recycling technology and making vehicles from the materials of end-of-life vehicles. This will result in a lower amount of resources used, lower waste and finally lower emissions. Several key players of the industry such as Renault, Toyota, JLR and Nissan have already started taking concrete steps towards a circular economy model in their operations (The Guardian, 2014).

2. Current state: what are key players focusing on?

Addressing environmental sustainable issues is therefore becoming a key strategic goal for automakers (DuPont, 2017). Since several years, a considerable number of players of the industry are investing in technologies and in improving their supply chain to address these problems, not only because they feel responsible to sustain the environment but also because they see in these challenges new market opportunities. Especially big players, such as Ford, are aware of problems related with air quality’s deterioration and climate change, and are implementing strategies to address these challenges (Ford, 2017).

In general, automobile manufacturers are focusing on 2 main UN sustainable development goals:

• Reducing carbon/GHG emissions of both vehicles and the manufacturing process
• Reducing the consumption of natural resources (especially water) across the automobile value chain

Climate changes

In the specific example of Ford, the company’s climate change strategy is to contribute to stabilize the atmospheric concentration of carbon dioxide at 450 parts per million (ppm). This is the level that many scientists, businesses and governmental agencies believe may avoid the most serious effects of climate change.

To reach this goal automotive companies are developing solutions which will (i) improve fuel economy consistent with regulatory requirements, (ii) pursue electrification strategy, (iii) develop alternatively fuelled vehicles, (iv) reduce global facilities CO2 emission, (v) reduce energy used per vehicle produced, (vi) reduce CO2 emissions per vehicle. Furthermore, another big player – Toyota – is aiming for an even more ambitious goal: Lifecycle Zero CO₂ Emissions. Toyota announced that it wants to reduce to zero not simply the CO₂ emissions produced in traveling and manufacturing, but all CO₂ emissions including in the processes of materials production, and disposal and recycling of vehicles (Toyota, 2017).

Water waste

Automakers are setting water-reduction goals for their operations, introducing a water-use-per-vehicle reduction target (e.g. Ford reduced the water used by 5.6% per vehicle from 2013 to 2015).

Additional environmental sustainable goals concern: increase the % of recycled/recovered vehicles and develop and implement sustainable materials strategy (i.e. focused on materials that have been obtained by socially sustainable means, that have lower environmental impacts and reduce global waste). Companies are also starting to engage with their suppliers to encourage target setting and to share best practices for energy and water use reductions

In conclusion, the main sustainability issues automakers want to address is climate change and the depletion of natural resources. Several big players of the industry have already set ambitious goals but they are failing in delivering such objectives. The biggest examples are Daimler and Volkswagen, which not only were unable to reach the challenging reduction of emission’s goals that they promised, but were found to manipulate emission data because they were not able to stay below the limit of emissions per vehicle imposed by regulations.

3. A business model innovation to support the automobile industry achieve the goal of lower emissions

Transport accounts for close to 60% of global oil consumption and an estimated 30% of global carbon emissions (World Energy Council, 2016). As developing countries are investing in their transport infrastructure, the demand for automobiles is expected to grow, placing greater pressure on Governments and the industry to find alternative fuel options that limit the carbon impact of the sector and reduce the dependency of the economy on oil-exporting countries.

It is within this context that electric mobility is receiving significant attention. Electric Vehicles (EVs)[1] have in fact multiple benefits that make them a promising solution to the growing sustainability issues of the transport sector:

• Reduce pollution in urban centres: EVs have no emissions of toxic substances and produce less noise than conventional vehicles
• Reduce energy consumption of the sector: EVs are estimated to be 3 times more efficient than internal combustion engines at converting source energy to the wheels (U.S. Department of Energy , 2017)[2].
• Reduce carbon emissions and economic dependency on oil-exporting countries: EVs allow transferring energy produced from renewable sources to the transport sector, reducing the overall need of fossil fuels in the sector.

For these reasons, governments around the world have set ambitious targets for EVs (Financial Times, 2017). In fact, many countries have invested (or announced their intentions to invest) significant capital to develop the charging infrastructure required to support the mass-deployment of electric-mobility. Meanwhile, major automobile manufacturers are developing new and more affordable EV models in the hope that consumers will gradually abandon traditional internal combustion engines. For example, Volkswagen has recently approved €9bn of investments over the next 5 years on developing its fleet of EVs (Financial Times, 2017).

The greatest obstacle to the mass deployment of electric-mobility

Despite these initiatives from the public and private sector, consumers’ “range anxiety”, related to the fear of running out of battery while driving their EV, persists. As long as consumers will perceive a limitation to driving EVs compared to traditional vehicles, the transition will take long.

In fact, today’s EV charging infrastructure is managed by multiple Electric Vehicle Service Provider (EVSP). EVSP are entities that operate as a contract party for the EV customer, providing EV-customer an RFID identification card that gives authorization to use the contracted charging stations and taking care of the end user authentication and billing processes[3]. The biggest issue is that these EVSP are not integrated, thus giving rise to the so-called “card nightmare”: a customer can only charge its vehicle at a station operated by the EVSP with which the customer holds a contract. A non-interoperable charging network significantly reduces the options for EV users to charge their vehicle and adds needless complexity to the system. As an article published in Forbes puts it, “if you’re about to run out of juice and find yourself at an Ecotality charging station but only have a card for a ChargePoint station, you’ve run out of luck!” (Forbes, 2012). To give a better sense of the issue related to lack of interoperability, imagine that the different providers of credit card payment services were independent and required a separate card to use their payment devices. If you enter a shop that uses a payment device not owned by your bank, you will not be able to finalize your purchase.

Investing in growing the number of charging stations is therefore only part of the solution to solving the problem of “range anxiety”. A more efficient means of supporting the mass deployment of electric mobility is creating an interoperable charging infrastructure that allows EV users to charge their vehicle at any station, both within the same urban centre and between cities. In other words, achieve ubiquitous re-chargeability. While some EVSP are partnering to allow EV users to use multiple stations (Lambert, 2015), the process is very slow and represents a bottleneck to the transition to e-mobility.

A business model innovation to unlock the potential of EVs

To achieve the goal of ubiquitous re-chargeability, there are several technical issues to be addressed. To begin with, an interoperable EV charging network will determine an increase in the complexity of data flows exchanged among the actors of the EV eco-system. The system will in fact be characterised by many-to-many bilateral relationships among the EVSP. If you consider a scenario in which hundreds of different EVSP manage thousands of EV charge stations, the number of permutations when calculating fees for a public charge event is likely to be immense (Figure 1). Moreover, the mass deployment of EVs represents a major challenge for operators of the grid which will have to balance the load of an increasingly complex network. At the same time, through better information flows, grid operators see EVs as an opportunity to buffer renewable power sources and balance loads. In fact, because of their anticipated controllable loads and reverse flow power supply that EV storage batteries can bring to the electric grid, through Vehicle-2-Grid technology EV recharging has the potential to become one of the main applications for Smart Grids (Technavio, 2015). Finally, an interoperable EV network will create significant back-office complexity for all actors of the electricity value chain (i.e. Distribution System Operators (DSO), Wholesalers and Retailers) to manage data flows on power consumption and billing details.

Figure 1: Simplified scheme of an interoperable “charge event”

All the above issues can be addressed through a business model concept that exists since many decades combined with recent technological innovation: The Virtual Clearing House (VCH). A VCH is an entity providing position netting among the EVSP, exchanging payments on behalf of their final customers without the use of cash (e-clearing.net, 2012). More specifically, the VCH will offer the following features:

• Interoperability and position netting: (i) allocate and settle charge sales revenue among EVSP, (ii) sets standards of the EV charging network; (iii) guarantee and manage the interoperability of the EV network, (iv) guarantee the security of transactions, (v) manage multiple payment methods (i.e. Charge ID Card, Credit Card, Debit Card, …)
• Grid efficiency: (i) collect and distribute charge data to energy supplies, grid operators and EVSP, (ii) control sell demand response services through V2G technology
• Planning & control: (i) regulate tariffs among actors of the EV value chain, (ii) support local authorities in planning the expansion of the EV charging infrastructure.

In terms of benefits, the main goal of the VCH is to achieve ubiquitous re-chargeability both within and between cities. For this reason, it can be considered a game changing concept in the EV ecosystem.  But there are also another set of key benefits associated to this business model innovation:

• Provides a central database offering public administrations and regulating authorities charge point information necessary for defining the regulatory frameworks of the EV charging infrastructure
• Creates the conditions for favoring the participation of private investors and free competition in the market of EV charging services
• Provides EV customers real time information through smart phones on the location and availability of charge stations
• Supports grid operators manage the impact of EVs on the grid, preventing distribution asset overload and buffering renewable power sources

Current state-of-the-art, costs and risks of the innovation

The concept of a Clearing House has been around for many decades in the banking industry. Only recently the idea is starting to be adopted in other industries to solve issues of growth and competition. For example, UK’s Railway Settlement Plan (RSP) represents a paradigmatic example of how a CH can change the way a service is provided to customers. RSP provides clearing services (among other IT based services) to rail operators including open access operators and third-party providers of information and retail services. The company was established on the privatization of British Railways to enable the new rail operators to continue providing a network wide retail service – something that passengers were familiar with prior to privatization. The RSP CH has many analogies with the one proposed for the EV ecosystem (Figure 2).

Figure 2: Analogies between RSP and the EV VCH

The idea of a VCH for the EV ecosystem is gaining momentum since 2012, with some large IT companies investing in the development of a similar platform. In fact, many of the large cloud computing companies, including IBM, SAP, Microsoft, and Oracle, see harvesting and managing data from EVs and charging infrastructure as a considerable revenue opportunity (Pike Research, 2012). For example, IBM has been involved in 13 different pilot projects across Europe to test the implementation of an integration platform for the EV charging infrastructure (SPIE, 2015). The company is now investing in the development of its own integration platform with the objective of providing support to utilities and governmental authorities in managing sell demand response services for the implementation of smart grids.

Despite the clear rationale and benefits for implementing an EV VCH, the idea is still stuck on paper. The main obstacle to its implementation is to be found in the complexity of the EV ecosystem, which involves actors of the electricity value chain, automobile manufacturers, governments and regulating authorities. Consequently, no single player is willing to take on the risk of developing an EV VCH.

4. Conclusion

In this blog we argued that the automobile industry should focus on EVs as part of its goal to mitigate climate change. However, without the support from the other stakeholders of the EV ecosystem, automobile manufacturers will shy from stepping up investments in the development and production of EVs. The business model innovation described is a powerful means to break the feedback loop in which EVs are stuck since years (i.e. sales of EVs will stay low as long as there will be few charging stations on the territory, but the charging infrastructure will remain under-developed as low as long as there are few EVs driving on the streets). While automobile manufacturers are not ultimately responsible for developing the EV infrastructure, we believe that they should work with grid operators and public authorities (e.g. Office of Gas and Electricity Markets in the UK) to overcome the barriers and facilitate the mass-deployment of electric-mobility.

Authors: Shruti ARORA, Vittorio GARGIULO MORELLI, Carolina PERISSINOTTO

 

Bibliography

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[1] EVs include Battery Electric Vehicles (BEVs) and Plug-in Hybrid Electric Vehicles (PHEVs)

[2] EVs convert about 59%–62% of the electrical energy from the grid to power at the wheels. Conventional gasoline vehicles only convert about 17%–21% of the energy stored in gasoline to power at the wheels.

[3] Please note that differences may exist among countries in the definition of this entity.