05/22/2012 03:04 pm ET Updated Jul 22, 2012

How to Sell an Electric Car

Imagine you could buy an electric car for the same price as an equivalent internal combustion model. Along with the car came a six-year recharging package, which for $150/month guaranteed you unlimited charging privileges and driving. (If you drive an average 15,000 miles each year, and get 25 true MPG in your gas model, this recharging contract is equivalent to gasoline at $3/gallon!)

In innovative industries this would not be a revolutionary business model -- it's how you buy a cell phone. The service contract pays for the bells and whistles on your new Droid or iPhone. Cell companies know that customers care most about upfront costs, and mostly don't like to lease -- so, in effect, the service contract is a proxy lease. The recharging package I just suggested for an electric vehicle is, in effect, a lease on the batteries which make the EV more expensive up-front.

But in the slow and sluggish world of cars, where even setting fixed prices for a new car has been a bridge too far, this kind of financial innovation is proving a hard sell. That's dangerous for American leadership in EV's and for the climate.

Overall, the world's biggest challenge in moving clean energy solutions is simple: they cost more up front, but cost less to operate over time because the fuel is free or very cheap. Energy efficiency solutions actually offer negative operating costs. But consumers, as opposed to businesses, have a high preference for products which are cheap at the front end. Consumers almost never come close even to taking life-cycle costs into account. One way to get them to do so is to limit their choices by requiring manufacturers to meet minimal efficiency requirements -- but that still leaves the dilemma that whenever there is a choice, consumers will migrate to the cheapest option at the point of purchase, not over the life-cycle of the product. So we can easily remain stuck with polluting, climate destroying dangerous fossil fuels -- even when clean energy would be cheaper -- because of consumer's focus on purchase price.

This is particularly true of electric vehicles, where selling lots of them is the key to getting their price down. It's not going to happen, at least in the US, fast enough, without some additional market push. (In fact, at present production volumes auto companies couldn't actually afford the deal I propose at the start today -- it would take more like a $200/month recharging contract, equivalent of gas at $4/gallon. But if they were selling 50,000 of an EV model my $150/month-$3/gallon deal is within reach.)

If American automakers don't start linking business model innovations to the technical creativity that underlies a Chevy Volt or the new Ford Focus EV, there is a real risk that in spite of the US technological leadership, we could lose the electric vehicle race. That's because the US faces some significant competitive disadvantages in electrification compared to, say, France. France has much more expensive gasoline ($8 gallon). Its nighttime electricity rates are unbelievably cheap, because its over-reliance on 24-hour nuclear power leaves it with surplus 2AM electrons -- lots of them. And a larger proportion of French driving is at short distances where EV range is not an issue. One cannot conceive the new French administration of Francois Hollande finding it ideologically offensive to arrange a partnership between the largely state-owned Electricite de France and a French auto company, even if the French government had to provide -- shock! -- loan guarantees or other financial support to jump-start a massive increase in the French EV market. (In fact, his conservative predecessor, Nicholas Sarkozy, made a $550 million down payment on such a partnership four years ago.)
