Asymmetrical Information - Megan McArdle

Electric Cars: A Flickering Business Model

Better Place is struggling to make electric cars work in a near-ideal environment. What does this mean for the future of these cars?

01.22.13 2:15 PM ET

"The paradox is that electric cars are perfectly suited for short trips–charge your car at home overnight or at the office during the day and you’ll drive worry free. But the economics make sense only if the car is driven a lot."  

An electric car is test-driven at the first electric vehicle demonstration centre in Ramat Hasharon near Tel Aviv on February 7, 2010. The centre, built by Better Place, aims to introduce all-electric vehicles and a network of charging points in Israel by 2011. AFP PHOTO/JONATHAN NACKSTRAND (Photo credit should read JONATHAN NACKSTRAND/AFP/Getty Images)

Jonathan Nackstrand/AFP, via Getty

That's Marc Gunther on the central problem with electric cars.  They're quiet, environmentally friendly, and have enviably low operating costs.  The problem is, the fixed cost of the battery drives up the cost of the car, to the point where it's simply not cost-competitive with an old-fashioned internal combustion engine.  Nor is it convenience-competitive: a battery takes a long time to charge, while it takes a minute or two to pump your car full of gas.  Ideally, electric car owners would be urban folks like me, with very brief commutes and plenty of time to charge in between.  In practice, urban folks like me rarely have a garage in which to charge their whizzy little electric flivver.

A startup called Better Place aimed to fix that problem by swapping batteries rather than charging them: they own the batteries, and will upgrade them if better technology becomes available.  For obvious reasons, they launched in Israel and Denmark, small countries where they could cover the whole nation without a huge install base.  Marc Gunther drove one of their cars and found it a pleasure--but not necessarily a success.

Shai is gone now, ousted last year as Better Place’s CEO, after raising and spending a big chunk of change — the company has raised an astonishing $850 million — but finding customers harder to come by. His successor as CEO, Evan Thornley, resigned last week after a wave of layoffs. Today, Better Place has about 500 customers in Israel and another 250 in Denmark–not nearly as many as forecast a few years ago. The company recently held a customer meeting near Tel Aviv; the good news is that customers love the company, the bad news is that 25% of them fit into one room. Insiders tell me that Better Place may have to return to the market to raise money this year, and you can be sure that won’t be easy.

. . . My own test drive revealed the pleasures and pitfalls of the Better Place model. The Renault Fluence delivered a smooth and quiet ride with lots of pickup. I loved the GPS, entertainment and battery information system, called Oscar. And the battery switch worked beautifully–you drive into the station just as you would drive into an automated car wash and, in a little more than five minutes, robots remove your old battery from underneath the car and replace it with a new. I reached one of the switching stations at about 9 p.m. when it was in “pause” mode, and a quick call to customer service had me on my way. It’s better than a gas station because you never have to leave your car.

The trouble is, I had to switch batteries twice during my 120-mile round trip, and each of the switches took me slightly out of the way. Better Place has built a network of 35 switching stations, enough to cover most of Israel, but there’s not nearly the equivalent of one in every town. Another 1400 charging stations are available. The Denmark network is also fully-deployed. Both are managed from a sophisticated operations center near Tel Aviv.

The trouble ahead is that Better Place has to grow to succeed. Only scale will bring down the costs of the cars and batteries. And right now, there’s just one car available — the Fluence five-seater — and no other choices on the horizon. The Israeli press is reporting that Idan Ofer, Better Place’s chairman, its biggest investor and one of the richest men in Israel, is now in charge of the company, and that he wants to focus on the core markets of Israel and Denmark. That’s understandable if the company is running out of cash, but it won’t bring the scale that’s needed. As one analyst told The Jerusalem Post: “The investment in Better Place is beginning to look more like an investment in a roller coaster than an investment in an infrastructure for electric cars.” Ouch.

Better Place’s vision still makes sense, until and unless fast-charging times get really fast. But the company is probably ahead of its time. Without lower battery costs or higher gasoline prices or, probably, both, the economics of electric cars are challenging for owners.

Of course, if electric cars ever became really widespread, battery costs would probably come down somewhat, as I presume that there are economies of scale. But while I think that many people have a Silicon Valley mental model about battery technology, where you pour in the investment dollars, and get exponential improvements and cost declines out the other end, battery technology has not kept pace with the amazing revolution in silicon microchips. Environmentalists frequently complain that green technology gets held back because it's competing with history--the existing install base of dirty, inefficient old technology that is cheap to run now, but which we would never choose if we were starting from scratch. But in the case of batteries, they're arguably competing with physics: the reason battery technology isn't getting better, faster, may simply be the inherent limitations of the form.  

"It's chemistry, not electronics", notes a commenter in this fascinating Straight Dope thread. Hydrocarbons are one of the most efficient forms of stored energy (and I'm told they basically maximize energy density + storability + safety). Robert Laughlin, the author of a rather controversial essay on climate change, argues that if we didn't have hydrocarbons, we'd have to invent them, because almost nothing else has the right combination of light weight and high energy necessary to, say, fly a plane. And you just dig them out of the ground, rather than having to manufacture it. Competing with them on cost is a daunting project.

That's not to say that we'll never have electric cars. But when you see them failing in Israel, the obstacles look pretty daunting. Israel has some of the highest gas prices in the world--almost $10 a gallon last August--and its compact size makes it easy to cover with battery-swapping and charging stations. The economies of scale would have to be amazing to make this business model work in a bigger country like the US.  Even if we somehow developed the political will to impose a $7 gas tax.

Which is perhaps why, so far, our electric car market isn't looking so bright.  We're a long, long way from Obama's goal of 1 million electric vehicles on the road by 2015.